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Translated from the German by PAUL ERSKINE 








By Way of Introduction 



Becoming a Banker 



The Responsibilities of a Banker 



A Bank’s Tasks Abroad 



The First Inflation 



The Nationalism of Currency 



The Financing of War 



The Second Inflation 



Other People’s Money 



The Third Inflation 



An End to Inflation 






Development Aid 



The Making of a Fortune 



Is There a Schacht System? 



Looking Ahead 





I have often been called a financial wizard. The French edition of 
my book of memoirs 76 Jahre mexnes Lebens was published under the 
title Memoires d'un Magickn. The American edition has the title 
Confessions of the Old Wizard . Yet the truth is that nothing in the 
world has so little to do with magic as dealing with money. Money 
must be handled with clear and cool calculation. Anyone who does 
not obey this maxim is in danger of tying himself up in all the many 
ways of earning and spending money. Money can no more be 
conjured into existence chan the alchemists were able to make 
gold. But money has many different kinds of attributes, some of them 
very intricate, so that the majority of people frequently find them- 
selves unable to understand certain financial transactions. For this 
reason the monetary system is enveloped in a cloak of mystery, 
secrecy and magic. 

Money is not always synonymous with wealth. It is true that we 
call well-to-do people millionaires, and thus unwittingly link this 
term with the currency concept - Mark millionaire, Dollar million- 
aire. But wealth is not only money. It makes a great difference 
whether a millionaire possesses one million Deutschmarks in cash 
or in his bank account, or whether he owns property of the same 
value. The difference lies in the ways in which such wealth can be 
used. Money may at any time be converted into other goods, 
other properties, or other people’s services, but the reverse is not true. 
The magic of money lies in its protean nature, which enables it to be 
used at all times, in all directions and for all purposes. This constitutes 
its wizardry, its secret, its mystery, its magic. 




Hardly any other object of human culture has been judged in so 
many different and. contradictory ways as has money. Here it is 
praised to the skies, there it is cursed and condemned. For some it is 
man’s highest good, for others it is despicable. Yet once one has 
mastered certain principles, nothing is so easy as dealing with money. 
The most important of these is the difference between ‘yours’ and 
‘mine*. Many failings in the field of money occur not because of 
any intention to deceive, but simply because those dealing with 
money lose sight of the concept of property. 

The fact that money can at any time take the place of other 
material goods effaces its boundaries. Besides this, the fact that the 
so-called double entry system of book-keeping has introduced 
impersonal in addition to personal accounts, is confusing for the 
inexperienced. To complicate matters, credit transactions, which are 
indispensable in trade and commerce, make it possible to confound 
present with future money. Borrowed money is never property, 
is never ‘mine'; it belongs to others and is thus always ‘yours’. 
But even the most inexperienced are sure about one thing: money 
is a possession which brings many and great advantages in its wake. 
In the primitive barter economy of past ages it was difficult to 
accumulate extensive wealth. It was impossible to add indefinitely 
to one’s herd of cattle (pecus-peamia), because the supply of fodder 
and accommodation was limited, and because cows are mortal. 
But with money it was and is possible to acquire anything at any 
time, and to preserve it. 

The invention of money was the pre-condition for the develop- 
ment of the modern national economy. Money became the epitome 
of property. For this reason the need Co acquire money is, next to 
love, the most universal of human urges. How to make money - 
this question and its attendant problems engages more of man’s 
thoughts and effores than almost anything else. The correct answer 
to the question is: through work and saving. But work requires 
exertion, and saving means forgoing the immediate utilisation of 
income - and thus privation, loss of present comforts. This requires 
a strength of character, not possessed by everyone. 

For this reason men’s - thoughts turn to other ways, of making 



money. Such ways, requiring less effort, or at least less physical 
effort, and offering much scope to human fantasy, have gradually 
developed in our modem economy. People are always trying to get 
something for nothing - to bet, enter lotteries, speculate on the stock 
exchange, and lend their savings for interest. They speculate not 
only with their own but also with borrowed money. Here the 
magic of money actually becomes tangible. The amount of work 
involved in these ways of making money is not very great. Men 
also hope for strokes of good fortune which will make them rich, 
for accidental discoveries of mineral deposits, for appreciation in the 
value of land, for gifts from rich benefactors, or even for pennies 
from heaven. Whichever way is chosen ‘everyone clamours for gold, 
everything depends on gold*. 

The significance of money as personal property is not restricted 
merely to man’s normal day-to-day needs. Not only do monetary 
riches permit a greater enjoyment of life by making it possible 
to acquire the goods and services necessary to live, eat and dress well, 
by enabling one to travel and to develop the mind and spirit, and 
by affording the means necessary to employ one’s leisure to the full; 
money also gives its owner power over other people, and over the 
direction of social life. All goods can be bought with money. 
Money buys other people’s labour which can be freely employed 
for one’s own social or economic purposes. Money empowers those 
who wield it to make use of personal or material forces. ‘If I can 
afford six horses, is their strength not mine? They make me feel 
like a real man, as if I had twenty-four legs.’ He who has money can 
control the means of production - a fact which led Marx to demand 
that these means of production should not be left in private hands, 
but turned into public property - collective ownership. 

The high-sounding sentences about Socialism which Marx linked 
with his theory no longer have the meaning Marx gave them. 
Since his demands have today largely been met and are accepted as 
justified by nearly all political parties, these phrases are no longer 
appropriate to the economic problems of our time. Today there is 
hardly a politician who would not maintain that his thinking is 
socially oriented. Now, the question is rather whether the means of 



production arc managed more effectively by a collective enterprise 
or by individual initiative. This is decided above all by results: all 
efforts, whether individual or collective, must aim at achieving the 
greatest possible volume of production. Collectivism, however, 
excludes competition, and it is only through competition that the 
most successful and the most able can exercise a decisive influence 
on the social product. Competition brings the best to the top and 
provides us with the means necessary to live life to the full, provides 
us with money, property, and wealth. 

He who makes money also wishes to benefit from it: he is not 
concerned merely with creating for others, but also - and probably 
principally - with improving his own lot. Therefore the problem of 
the economically active society is not so much one of manipulating 
the means of production, but more one of distributing the social 
product. The inequalities in the distribution of the social product 
which have existed for thousands of years and the contrast between 
rich and poor will always remain in being. They are the difference 
between the successful and the unsuccessful, between the talented 
and the untalcnted, between the able and the incapable, between 
the diligent and the indolent. 

The economy is governed spiritually and intellectually by technical 
and organisational ideas and institutions. New techniques, new 
organisations, new combinations, are expressions . of the spirit. 
They originate in the mind of a single individual, never in a multitude 
of individuals, never collectively. Even if an industrial enterprise is 
subject to the decisions of a collective consortium, in each consortium 
new thoughts and ideas always come from individual members. 
And all depends on whether such individuals prevail over the 
collective or not, that is, whether understanding and reason triumph 
over natural indolence. Here, it is not a question of a mere ex- 
pression of ideas, but of putting these ideas into practice. This 
is difficult in any kind of group because the habitual interests and 
ordinary ideas of the majority must dominate. It was with justice 
therefore that philosophers and poets have said ‘Reason has always 
been the preserve of the few, the majority prefers nonsense*. The 
consortium is ruled by mediocrity. Every consortium deliberates 



slowly and clumsily. For this reason the masses in times of emer- 
gency have often, , perhaps too often, granted an individual absolute 

Fortunately, the saying that everyone clamours for money is 
not altogether true. Making money is always bound up with risks. 
He who seeks profits must be able to bear losses. To acquire riches 
by legal means requires talent, diligence and the renunciation of 
comforts. Most men lack these qualities. For them a moderate 
income enabling them to enjoy life’s ‘simpler pleasures’ is sufficient. 
They eschew risks. Security of income is worth more to them 
than a possible but doubtful profit. Security of work, and provision 
for illness, old age, injury and unemployment, arc therefore in the 
forefront of social controversy. 

On the other hand, there are many people who seek goals other 
than mere security of existence. It is true that this is a minimum 
requirement of every family, yet many individuals place great 
value on performing some service in the spiritual, intellectual or 
social sphere, irrespective of whether or not they are rewarded. 
Scientists, soldiers, civil servants, clergymen, teachers, politicians, 
writers and many others fall into this category. They see their task 
as fulfilling their duties in the fields chosen by or entrusted to them, 
thereby satisfying a real ambition. They arc die moral and spiritual 
6lite of political society. It is foolish to rebuke the ambitious. The 
progress of the world depends on them. 

On a journey through Turkey which I made with some friends in 
1909 the conversation turned to our future careers. I said ‘One day 
I should like to be of service to the public, provided that I am then 
completely independent financially. I do not wish to be one of those 
officials who live in a constant state of anxiety because their economic 
existence depends on strict obedience of their superior’s dictates. 
As an official I want to be able to return to private life at any time 
should my service lead me into conflicts of conscience or conviction/ 
Already then' I saw that material dependance created spiritual 
bondage. He who works only to order has no pleasure in his work, 
and loses his creative powers, his initiative, his best faculties. My 



assertion showed that though I did indeed wish to be financially 
independent, I placed service to the public higher than the mere 
making of money. 

I have often put this concept to the test. When I returned to 
public life after my acquittal in Niiraberg, Kaisen, the Social 
Democrat president of the Senate of Bremen, tried to shame me 
by calling me the highest-paid official of the Nazi regime. I was 
able to shame him with the reply that when Hitler recalled me to the 
post of President of the Reichsbank I voluntarily and on my own 
authority reduced my salary to a third of that I had received under 
theWeimar republic. 

When, in the middle of November 1923, I was made Reich 
Currency Commissioner, the following conversation took place 
between myself and the Salary Referee of the Reich Finance Ministry : 

‘I wish to bring my secretary' with me,’ I began. ‘How much will 
she be paid? * 

‘Our secretaries receive a salary of DM (Deutschmarks) 200 per 

‘That doesn't seem very much. At the bank Miss Stcffcck had a 
salary of DM 600 a month. What is the salary of the Reich Currency 

‘He is paid DM 400 a month.’ 

‘Compared to my present income that doesn’t seem very much 
either. But I have a suggestion: if you grant Miss Steffcck my salary, 
as well as that due to her, she will still have DM 600. I, for my part, 
will renounce my salary.’ 

‘Do you mean to say you will work for nothing?’ asked the 
government official, disconcerted. 

‘On condition that you pay my secretary DM 600, yes.’ 

Just think of it: the man who would have the task of ending the 
worst currency inflation in history was expected to be content with 
a salary of DM 400 a month! How could I, with a family of four, 
have undertaken such an office if I had not been able to defray 
my living expenses out of savings? I gave up my highly-paid post 
as principal of one of the four largest German banks, I resigned from 
over seventy lucrative positions on supervisory boards, all because 



an ideal drew me on. I could do so only because out of my own 
resources I had made provision for a normal civilised life. 

But it is not merely economic power which can be bought with 
monetary riches. Much more significant, and often also more fatal, 
is the influence of money on a man’s spirit and character. Here I 
leave aside all cases of direct bribery and corruption, and will 
speak only of everyday occurrences. In all democracies members 
of parliament are elected by the public. Freedom of speech and 
opinion is one of the fundamentals of political life. Public expressions 
of opinion have the aim •— and cannot have any other - of gaining 
adherents for one’s opinions, and thereby achieving a party majority. 
As long as political bodies were small, this was a simple task; with 
today’s masses it is difficult. Nowadays one can reach the voter only 
by means of the mass communication media. The necessary propa- 
ganda is spread by meetings, the press, radio, television, and political 
pamphlets. For all of which vast sums of money are required. 
He who can dispense the largest sum of money has the best chance 
of gaining supporters. Since dominance over public opinion offers 
countless opportunities for influence in and profit from political life, 
the modem political institutions, state, municipality, and public 
authorities are subject to a process of opinion-fabrication, which 
often serves special interests and not the common good. And all this 
because money talks. 

The production and distribution of books and newspapers is an 
expensive business. Radio and television are also costly. Anyone 
who is able to afford these can exert a great deal of influence on die 
views and opinions of readers and viewers. If a single publisher 
can reach a daily audience of millions by means of his publications, 
this gives him a power which carries within it great potentials for 
good, but also great dangers of abuse. One can bet large odds on the 
likelihood that a reader or viewer who is bombarded daily with a 
certain point of view will make room for this view in his thinking 
and be influenced by it. He who promulgates his views with the 
largest amount of propaganda has the greatest chance of making 
these views prevail. The most succinct description of this state of 
affairs and its seriousness was given by Oswald Spengler: ‘Today 



we live so cowed under the bombardment of this intellectual 
artillery that hardly anyone can attain to the inward detachment 
that is required for a clear view of the monstrous drama. Three 
weeks of press work, and the truth is acknowledged by everybody. 
Its bases are irrefutable for just so long as money is available to 
maintain them intact. Its arguments are overthrown as soon as 
the advantage of financial power passes over to the counter-argu- 
ments and brings these still often er to men’s eyes and ears. Here 
also money triumphs and forces the free spirits into its service. A 
more appalling caricature of freedom of thought cannot be imagined. 
Formerly a man did not dare to think freely. Now he dares, but 

The Americans have extended the phrase ‘brainwashing’ to apply 
to this state of affairs. This brainwashing has today become the most 
important means of shaping public opinion. Usually it goes by the 
more harmless name of ‘public relations’, and it is practised, on a 
global scale. From innocent beginnings it has developed in some 
respects in a most ominous way. 

The influence of money is not stopped by state boundaries. Some 
decades ago a book appeared in America called Dollar Diplomacy. 
In it the author showed contemporary examples of how American 
money influenced the governments, parliaments and economic 
circles of other lands to pursue political policies more friendly to 
America. Those in a position to grant large loans to other countries, 
who use their capital to develop industries in these countries will 
engender a friendly political reaction. There is a certain humour in 
the fact that such financial methods of gaining influence often occupy 
the foreground in the politics of so-called development aid. 

The seductive power of money also frequently threatens the 
execution of justice. Even if in culturally-advanced countries corrupt 
judges have to all intents and purposes disappeared, there are still 
quite enough cases where the verdict has been influenced by the 
fabrication of opinion, engendered by money. History shows count- 
less occasions where money was used to bend the ends of justice, 
and there was even a time when the large mass of people believed 
that money could buy them heavenly blessings. ‘When the coin 



rattles in the box, the soul floats up to heaven/ Hans Sachs 

How questions of money can influence the course of justice is 
shown by the events I have lived through. I repeat them here because 
I wish to base this book, as far as possible, on my own experiences. 
In September 1948 I was acquitted by the de-nazification tribunal and 
Court of Appeal in Stuttgart. The political authorities reversed 
this judgment and instigated a new hearing. The verdict then 
reached was afterwards shown by the government ofWurtemberg 
to contain as many as six breaches of law, amongst them the fact 
that owing to the Court’s lack of competence I was wrongfully 
arrested inWurtemberg. This verdict too was quashed for political 
reasons. These proceedings exposed the government to extremely 
unpleasant public discussions, which led to an offer whereby all 
proceedings against me would be dropped if I agreed to forgo 
compensation for wrongful arrest. On my lawyer’s advice I agreed 
to this compromise. 

An ironic comedy was to follow this tragedy. Some time later the 
President of the Government of Stuttgart came to see me, to 
enlist my co-operation in some project or other. I referred to the 
impropriety with which my case had been treated in Stuttgart. 
Came the reply ‘But why did you keep to your promise not to seek 
compensation? After all, the government’s procedure was pure 
extortion. Every Court would have upheld your point of view.’ 

Yes, money really is quite an uncanny thing. Several times in my 
public life I was brought face to face with its uncanny quality. 
Because I was able to master it, I earned myself the title of magician 
or wizard. Of course, this only happened because to this day many 
of my measures have remained incomprehensible to a large number 
of people. Often it takes a long time for the sense and import of an 
act to become apparent. And yet everything was perfectly simple 
and straightforward. 

The first time I was called in to master a difficult monetary 
problem was when the German Mark had been so devalued by the 
inflation following the First World War and the French invasion of 



the Ruhr that an American Dollar was equivalent to 4 billion 
German Reichsmarks. Expressed in figures this reads: $i=DM 
4,000,000,000,000. The problem was to create a currency with 
which the small man could once again operate. This was the time 
when someone who asked why a German discount house in Berlin 
was building another two stories, received the answer that they 
were necessary to accommodate the bank clerks who would have to 
write the extra noughts. ‘I thought that in discount houses the 
noughts had their offices on the first floor/ was Carl Fiirstenberg’s 
mocking rejoinder. 

The next monetary absurdity confronted me with the problem 
of how Germany was to pay the reparations with which it had been 
saddled after the First World War. These payments had to be made 
in foreign currency. Quite apart from the fact that the German Mark 
was worthless, the victors had no use for Deutschmarks in their 
economies. They wanted to be paid in their own currencies. But 
where was Germany to find these foreign currencies? 

A third problem arose out of the fact that after the First World 
War Germany had borrowed 20 milliards of Marks in loans raised 
abroad, intending to use the loaned money to bring its economy 
back to a viable condition. The loans and the interest on them load 
to be repaid. Not only had the necessary funds to be raised in 
Germany, but once again foreign currency was needed before pay- 
ment could be made. The outstanding credits and loans were 
expressed in Dollars, Francs and Pounds Sterling, and had to be 
repaid with interest in the same currencies. 

Another time I was faced with the problem of how to help 
a German economy which was completely impoverished and left far 
behind in foreign trade back onto its feet. The world economic crisis 
at the beginning of the ’thirties had reduced world trade to a third of 
its former level. Markets contracted and deprived many countries in- 
cluding Germany of their export opportunities. Industry stagnated, 
leading to massive unemployment. Social misery and communist 
agitation grew into a real threat. How could this situation be relieved? 

Germany’s re-entry into world trade was the next problem in the 
solution of which my experience in monetary policy had to be 



brought into play. How could a Germany bereft of capital and cut 
off from foreign currencies once again obtain the raw materials 
required for the resurgence of its industries? Germany's own mineral 
resources are inadequate. To meet the needs of its people for agri- 
cultural products and of its industry for raw materials, imports are 
essential. Germany must seek to pay for these imports out of the 
proceeds from the sale of its industrial products. And where were 
the means necessary to create these proceeds to come from? 

And finally there was the need to develop the country's means of 
production and investment so that the empty workshops, the idle 
machines and the willing labour could once again be made pro- 
ductive. Stocks of commodities had dwindled, capital savings had 
been consumed in the crisis years. New capital and new means of 
production had to be brought into existence. 

In the following pages I will endeavour to show how all these 
economic and financial problems were solved. So far as possible I 
will illustrate my thesis with examples drawn from my own 
experience; theoretical discussions will be eschewed. In 1927 the 
German Publishing Institute in Stuttgart asked me to write a history 
of the stabilisation of the Mark in 1924. After submitting the 
manuscript, I received a letter from the publisher in which he told 
me that he had with some apprehension expected a dry, unreadable 
book, and was now overjoyed to find that the book treated its 
subject in a manner which enabled the reader to grasp the most 
difficult problems by referring them to his everyday experience. 

I will try to use tliis method in this book too. It is not a text-book 
but a book of experiences. For the best school is not in the class- 
room, but in life itself. 

But the fact that it deals with an interesting chapter in economic 
history is not the only justification for this book. For it will be 
shown that the problems which were encountered in the period 
between 1920 and 1940 are not unique phenomena. They recur 
from time to time in this or similar form. Thus at the end of the 
Second World War financial problems were once again in the 
forefront of the world economy. The international credit system 




which before the two world wars functioned well-nigh ideally in 
facilitating world trade, opening up new markets and financing new 
means of production and transport, has until this day not been fully 
restored to its former condition. A whole series of poor countries 
are anxious to participate in world trade and clamour for development 

Whereas before the world wars the gold standard regulated 
international payments without any difficulty, today there are a 
whole series of organisations like the World Bank, with its daughter 
associations, the International Monetary Fund and others, which 
seek to adjust the value of die various currencies to each other, and 
to regulate their reaction upon one another. Once again, as after the 
First World War, ever)' conceivable theory which might lead to a 
solution of the problems of our economy is being tried. Yet per- 
haps it is possible to discern a few things in the history of the war 
and inter-war years which lead away from theories and into practice. 
It always bears repeating that the politics of currency and money 
is not an exact science, but applied art. Naturally, every art has its 
own handicraft. So too dealing with money, as in banking, is a 
handicraft the rules of which must be mastered. But die correct 
assessment of economic processes, and last but not least, the strength 
of character to resist tempting pathways and interventions by 
political force, are also part and parcel of monetary and currency 

One of the enticing pathways of monetary policy is to make use of 
credits while frivolously and irresponsibly leaving out of considera- 
tion all thoughts of repayment. It is tempting to spend the money 
obtained through credits immediately, and to leave the worries of 
repayment to one’s successors. Each debtor must examine his 
accounts before raising credit. However, only too often political 
desires stand in the way of such self-examination. To guard against 
such eventualities the politician responsible for monetary and 
currency policies needs strength of character which frequently 
put his office as well as his person to the test. In the ensuing I will 
have a few things to say on this theme. 



The banking system has a long history. The expansion of world 
trade which took place cowards the end of the Middle Ages 
necessitated a professional organisation which would regulate 
the transmission of payment from place to place and country to 
country. The banking system developed in conjunction with the 
goods trade. The cradle of our modem banking technique is to be 
found in the towns of Northern Italy. It was here that the problem 
of an inter-local and international payment system, by means of bills 
of exchange and letters of credit, was first posed and solved. 

The use of capital to grant loans began at an even earlier date. 
In the Middle Ages professional money lenders were almost always 
Jewish. Their concentration into ghettos, and the dictate which 
forbade Christians to charge interest, more or less compelled Jews 
to become money dealers and money lenders. Although at the 
beginning it was tainted with the odium of usury, the credit business 
proved just as useful and necessary for the development of the 
economy as the interlocal transmission of payment. Without the 
transmission of payments by banks to countries everywhere, our 
modern world economy and our all-embracing world trade would 
be unthinkable. And without a system whereby credit can be 
granted to producers, our modem economy could not have come 
into existence. 

Many banking families achieved not only riches but also great 
public honours. A reminder of Florence as a trade and banking 
centre is the Florin, a gold coin minted in Florence and accepted 
all over the world. The name has remained in use until today. 




The Medici, a Florentine banking family, experienced a meteoric rise 
to fame and fortune. Towards the middle of the fifteenth century 
a Medici achieved supreme rule over all Florence, and under his 
successors the culture of the Renaissance reached its peak. The 
Medids used their riches magnanimously to further the arts and 
culture. They became Counts and finally Dukes of Tuscany. 
Catherine of Medici was the mother of the French King, Charles 
IX, and during the religious wars in France, she was, before her son’s 
coming of age, Regent for many years. In the seventeenth century 
Philippine, the daughter ofWelser, proprietor of a large banking 
and merchant house in Augsburg, became the wife of the Austrian 
Archduke Ferdinand IT. They founded the well-known collection of 
art and armour which is housed in Schloss Ambras near Innsbruck. 

Many Jewish banking families also achieved fame and fortune. 
The names of Rothschild and Mendelssohn are only the best known 
amongst them. They, too, have their place in the politics of culture. 
When on the occasion of a visit to Paris I was introduced to a Baron 
‘EschtalT and asked about the spelling of the name, it turned out 
to be Eichtal. He was a relation of the Bavarian Court factor, 
Seligmann, who lived in the first half of the nineteenth century. 
Not only was Seligmann elevated to the nobility, but he also suc- 
ceeded in marrying all his six daughters into the Bavarian aristocracy. 

The transmission of payment and the granting of credit have an 
important common pre-condition. They rest on faith in the word of 
and the ability to pay oft' the other parties to a transaction. Credit- 
worthiness and integrity occupy a central role in the business of 
banking. The banker must acquire exact information about the 
character, financial resources and diligence of his clients. He enjoys a 
relationship to his clients similar to that between doctor and patient. 
This was also the relationship of Court factor to Prince. 

Every relationship involving trust requires comprehensive legal 
security. Contracts must be honoured. Justified claims and obli- 
gations must be fulfilled. The banking system cannot operate without 
the legal security of suitable laws resting on the recognition of 
private ownership. The banking system will always remain one of 
the mainstays of private ownership and of contractual obligations. 



The legal interpretation of what constitutes a banking transaction is 
sufficiently broad to make provision for the fact that a verbal agree- 
ment between bankers is just as binding as a written contract. 
Share transactions on the stock exchange are today still carried out 
by word of mouth. The simple words ‘to you’ and ‘from you 
suffice to effect the transfer of securities from one owner to another. 
Only once in my whole banking career did a bank - a joint stock 
bank too - fail to honour a verbal undertaking on the pretext that it 
had not been confirmed in writing. All business connections with 
this bank, which — though this is no excuse — was experiencing some 
difficulty in maintaining its liquidity, were severed immediately. 

Since every loan contains an obligation over a shorter or longer 
period, all banks are greatly concerned lest the value of money should 
not remain constant during the period of the loan. This concern 
is essentially of a moral nature. In book-keeping terms banks, 
like insurance companies, are little if at all affected by inflationary 
depreciations in the value of money. Their liabilities are expressed 
in the same currency as their assets. They owe Marks and possess 
Marks. Inflationary falls in the value of the Mark affect both sides 
of the balance sheet equally. Nonetheless, it is very much in the 
interest of the banks that their clients should not suffer as a result of 
falls in the value of money. 

In trade a credit must ride the manufacturer over the time 
between the receipt of an order for a commodity and the receipt 
of payment for it after it has been manufactured and delivered. 
The value of the money which is due when the loan is repaid must be 
the same as it was at the time when the loan was granted. The 
constancy in the value of money is particularly important in foreign 
trade, which must thus be carried on not only under the same legal 
conditions, but also under conditions in which the need for stable 
values is acknowledged. For this reason the essay on currency in 
the standard work on political economy, the encyclopedia of political 
science, starts with the sentence ‘The decisive question is whether 
or not price stability is and remains secure from the money side’. 

It is one of the tasks of a bank to protect its clientele against the 
consequences of exchange-rate fluctuations in the international 



payments traffic by accepting any loss resulting from this cause. 
This is done by balancing their clients’ payment claims and obli- 
gations one against the other so that they become due at the same 

In the course of the historical development of the economy the 
credit demands by customers reached proportions far in excess of the 
financial resources of individual banking concerns. This was 
especially the case in all business transactions where credit was sought 
not by individual concerns, but by larger corporate bodies. In 
feudal times it was the territorial overlords who needed credit on a 
large scale. Road building and other provisions for traffic required 
great capital outlays, even in peacetime. But it was especially 
preparations for and campaigns of war which required more money 
than was readily available. Here the solution was to raise loans 
the repayment of which was spread over a great many years. 

As a result of this development the banker ceased to be a money 
lender with his own capital and became a money dealer, money 
transmitter and money lender handling the capital of others, who 
helped his customers to obtain money from third persons. The 
retinue of nearly all die larger Ducal courts included a so-called 
Court factor, whose duty it was to raise money for the Court and 
the State. In time these factors became permanent advisers and 
managers in matters concerning money. They did much of value, 
but at times their advice led to taxes which were hard on the under- 
dog. Not a few amongst them earned the hatred of the populace. 

The princes made every endeavour to retain the services of their 
Court factors, and, in addition to making profits by way of interest 
and commission, they were protected from persecution, and often 
also rewarded with external honours, such as elevation to the nobility, 
permission to own laud and similar privileges. The procuration of 
money by means of large loans led to the sub-division of the amount 
of the loan into smaller segments which were then sold to the general 
public. This method of raising money involved considerable risks 
because the borrower demanded a firm undertaking that he would 
be granted the loan, but the banker could not sell the segments 



until after the loan had been granted. This led to the formation of 
consortiums which undertook the acceptance of loans, and thereby 
spread the risks over a number of banking firms. This method was 
facilitated by making the loan segments (bonds) negotiable, so 
that the individual purchaser of such bonds could resell them at 
any time. This negotiability provided the impetus for the creation 
of the stock exchanges. 

In addition to the demand for credit by public bodies, the develop- 
ment of the modern economy led to a massive need for credit in 
production and trade, a need which could no longer be met by the 
private banking firms. The formation of consortiums soon proved 
to be an inadequate answer to the great increase in private industrial 
credit. This led to the development of other forms of industrial 
enterprise, such as joint-stock banks, limited companies, and savings 
banks, which existed side-by-side with the private individual 
banking concerns. 

While in the private banks the natural tendency was for the son to 
succeed the father in the management of the business, today’s banks 
as public companies draw a large proportion of their managerial 
forces from amongst persons who come from outside, and who 
reach high positions through merit, not through family connections. 
The larger companies become, the more directors and managers 
are needed, so that a family on its own can no longer provide all the 
executives. The banking profession has thus become a profession 
which is open to everyone. With the development of the large 
banking institutions a certain degree of bureaucratic administration 
has become unavoidable. Nonetheless, the individual talent of a 
unique personality can still make its mark on a large concern. 

I do not come from a family of bankers. Grandfather Schacht 
was a doctor, and my mother’s father was a chief of police in Schles- 
wig. In both families high value was placed on an interest in science 
and on service to the public. A wealth of knowledge and a high 
degree of culture were regarded as life’s noblest aims. There is, 
however, amongst my antecedents a man whose career was strongly 
connected with matters of finance, money and currency. My 
mother’s grandfather, Christian Ulrich Detlev, Freiherr von Eggers, 



was a politician who was also one of the most significant economic 
and financial experts of his time. Bom in Schleswig-Holstein - 
the family originally stems from Hamburg - he entered the service 
of the state of Denmark, to which Schleswig-Holstein belonged at 
that time. At the same time as carrying out his duties for the state he 
lectured in Copenhagen University and was a member or superior 
of the state’s colleges for higher education in commerce and finance. 
He brought about the abolition of the trading monopoly in Iceland 
and granted the citizens of Iceland freedom of trade. He was the 
most active and effective assistant to the minister, Andreas Bernstoff, 
who achieved the abolition of serfdom in Holstein. He was curator 
of the University of Kiel. He advised the Imperial Austrian govern- 
ment on financial policies, a service for which he was awarded the 
hereditary title of Reichstreiherr (Baron). He knew Goethe, and 
was friendly withWieland. He was one of the leaders of the en- 
lightenment in Germany. 

The life of this man has been a preoccupation of mine since my 
youth. When I think of him now in my old age two episodes in his 
life strike me as particularly significant, hi 1798 Eggcrs represented 
the Danish government at the Rastatt Congress at which the German 
Princes forfeited all German possessions on the left bank of the Rhine. 
Although a Danish civil servant, he could trace his German descent 
back for centuries, and was extremely perturbed by the lack of 
dignity, the servility and the loss of self-esteem exhibited by the 
Germans at Rastatt. 

The second episode in his life has a curious connection with 
myself. As a result of the Napoleonic wars and the English military 
and economic blockade, the Danish economy was brought nearly 
to a standstill, with its monetary system totally in ruins. Then in 
1812 the Danish government introduced a currency reform whereby 
they created a money, the security for which was formed by the 
entire landed property of Denmark. Eggers protested in the 
strongest terms against this measure. Since he died in the following 
year he did not experience his vindication. In fact he was shown to 
be right when it proved necessary to resort to the mortgaging of 
property, resulting in a far-reaching transformation of the economic 



conditions and the state of property ownership of Denmark. The 
Eggers family was amongst those who lost their fortunes. I was 
compelled to think of these events and experiences when, as 
Commissioner for National Currency and President of the Reichs- 
bank, I did everything to take the Rentenmark, which was 
similarly based on landed property, out of circulation as quickly as 

Despite my interest in the life of Christian Ulrich Detlev Eggers, 
my admiration for him did not lead to my deciding to become a 
banker or financier. In T 895 I matriculated at the ‘Johanneum’ 
Grammar school in Hamburg, having completed my high school 
studies in nine years, moving up a class each year. Arithmetic, 
mathematics and physics meant little to me, while I found German 
literature, languages and history fascinating. Because my older 
brother was a student of medicine, I too began to study medicine 
at the University of Kiel. It took me only a few weeks to discover 
that I was completely unsuited for medicine. I took my leave, and 
went to visit my Danish relations called Eggers in Jutland, and my 
grandfather Schacht in Friedrichsstadt. 

When in 1892 a great cholera epidemic had broken out in Ham- 
burg I had spent a week with grandfather Schacht, and had come to 
know my family home in Ditmarschen. For hundreds of years 
my ancestors had been peasants in the marshes be ween the Elbe and 
Eider. Now I learnt about the factors which were part of my 
heritage and which had shaped my nature too. Ditmarschen had 
always been a land of free farmers. Serfdom and socage service had 
never existed there. No castles had ever been built between the 
mouths of the Elbe and the Eider. Even incorporation into Holstein 
and later into Denmark did nothing to alter this state of affairs. 
A Danish king had once said: 'Are Ditmarschers supposed to be 
peasants? They behave as if they were country squires/ Throughout 
all the vicissitudes of history this people retained its identity and 
asserted its unswerving inner determination. This inheritance is 
bound to have had its effect on me: A present given to me on my 
60th birthday by my colleagues in the Reichsbank reminded me of 
Goethe’s words: 



No time, no power , can disintegrate an established form which is living 

and developing. 

Of course, my flight from medicine was no solution. I had to 
decide to which subject I would devote my studies. A discovery 
which I made while I was with my grandfather provided me with an 
impetus. In his youth my grandfather, then an assistant in a phar- 
macy inWeselburen, had been friendly with Friedrich Hebbel, who 
was then secretary to the head of the local board. An exchange of 
letters which took place between them at this time came into my 
hands on rummaging around in my grandfather’s loft, and directed 
my interest to Germanic philology. I devoted my next semester at 
the University to this field. 

However, when, during my third semester, which I spent in 
Munich, I attended lectures by Lujo Brentano, the most famous 
economist of his time, I knew I had found the subject which interested 
me most. I began to study political economy. My interest in 
German philology was thereafter restricted to a study of journalistic 
techniques and newspapers, a branch of knowledge which had not 
then been formalised. I published a small paper on this subject 
and touched upon the political and economic significance of news-, 
papers. Written in 1898 and entitled ‘Statistical inquiry into the 
Press of Germany’ it was the first study of its kind and appeared in 
Conrads Jahrbiichern fur Nationalekonomie und Statistihs (Conrad’s 
Yearbook for Economics and Statistics). This theme engaged so 
much of my attention that when I entered for my doctorate in my 
home town university of Kiel I suggested to the admirable Professor 
Hasbach that I should write my dissertation on the theme of the 
political and economic significance of newspapers. It would have 
been the first ever dissertation on newspapers - since then hundreds 
have appeared - but Hasbach rejected the idea with merciless irony. 
Instead I submitted a thesis on ‘Theoretical aspects of English 
mercantilism’ which, as I learnt many years later, achieved the grade 
of Valde laudabile’. My doctorate as a whole did not reach this 
high standard, because I only just made the grade in philosophy, a 
compulsory subject. 


2 ? 

During the two years after taking my degree, which I spent 
as syndic of a commercial association, I must somehow have drawn 
attention to myself. On the board of the association were business- 
men, bankers and industrialists who counted amongst the greatest 
names of their time. Soon from amongst their numbers I received 
offers of posts, once as syndic of a chamber of commerce, another 
time as economic adviser to the Allgemeinen Elektrizitats Gesellschaft 
(General Electricity Co) and yet again from the Bank of Dresden. 

Although I gained practice and proficiency in writing newspaper 
articles and in speaking at conventions during these apprentice years, 
I did not see my future in representing one-sided economic interests. 
I did, however, find stimulus and instruction in personal contact 
and collaboration with the leaders of the organisation. For a year 
I worked in close conjunction with Georg von Siemens, Director of 
the Deutsche Bank. In addition I came into personal contact with 
many other leading figures in the German industrial scene of the 
time. I did not wish to associate myself with any special group, 
but sought more general activity in the field of economics. It 
seemed to me that I would most probably find the right opening 
in a large bank. Out of the many alternatives open to me, I decided 
to accept the offer from the Bank of Dresden. 

The negotiations with the management of the bank preceding my 
engagement took an amusing course. I was asked how much I 
was earning at present. My reply that the figure was DM 8,000 per 
annum dumbfounded everyone. ‘But/ I was told, ‘our chief clerks, 
all older men, are paid only DM 6,000 a year. Surely you will see 
that we cannot pay a young new entrant like you (I was 25 years old) 
more?* My answer solved the problem. ‘No matter, I shall work for 
you for DM 6,000 per annum. I am sure that in a year’s time you 
will not hesitate to pay me more.’ My proposal was accepted, and a 
year later my prophecy came to pass. The above figures may not 
seem much in our inflationary times, but in those days 8,000 gold 
Marks per annum was a considerable income for a 25-year-old. 

Thus I became a banker. After trials and errors in medicine, after 
a love affair with German philology, and after preparatory studies in 
economics I made my career in banking. I have not lived to regret it. 



Every profession has its manual or spiritual working tools. When I 
entered the service of the Bank of Dresden I did indeed have the 
customary theoretical knowledge gleaned in the course of my studies 
in political economy, but I had no idea of the practical techniques 
of banking. However, the Bank of Dresden did not ask me to be a 
banker. What they expected of me was something else - today it is 
called ‘public relations*. My endeavours were aimed in quite a 
different direction: I was looking for the meaning and essence of 
monetary policy. 

The Bank of Dresden's public relations were not very good. 
It had been hard put to defend its standing during the banking 
crisis of 1901. The collapse of the Bank of Leipzig, a Saxonian 
institution, attracted attention and some criticism to the Bank of 
Dresden, which was also of Saxonian origin. The bank was founded 
in Dresden in 1872, but had long had its head offices in Berlin with 
branches in many other German towns. After the experiences of 1901 
the bank sought to establish better relations with the public. 

The only section of the press which had hitherto been favoured 
as a vehicle for publicity consisted of die many small journals which 
chided and begged their way around the Berlin stock exchange and 
contributed to meaningless stock exchange gossip. They were fed 
with advertisements, particularly with commissions to reprint 
prospectuses giving details of new issues of shares or bonds. The 
larger newspapers also welcomed these prospectuses, and a critical 
mention in such a paper was of much greater value. But contact 
even with larger papers was restricted largely to the insertion of 
advertisements. Regular and informative contact with the financial 
editors of the larger newspapers, taken for granted today, was well 
nigh non-existent at that time. I myself have throughout my career 
had close contacts with newspapers, particularly with the Frankfurter 
Zeitung. As bank director and later as president of the Reichsbank I 
frequendy discussed economic and financial problems in all con- 
fidence with Albert Oeser, editor of the financial section of this 
paper. I was often able to give him information on condition that it 
must not be published before a certain date. He never let me down. 

At die time when I entered the service of the Bank of Dresden, the 



financial editor of the Berliner Morgenpost, which belonged to the 
publishing house of Ullstcin, was particularly ill-disposed towards 
the bank, and often made unjustified comments on its dealings. My 
management asked me if there was anything I could do to alter 
this state of affairs. I did not deliberate for long. Naturally I did 
not wish to, appear as a suppliant or complainant, and therefore 
sought another point of departure for my negotiations. Without a 
moment’s hesitation, I withdrew from the Morgenpost the advertise- 
ments which were inserted in the other papers. The result was a 
lively protest by the publishers addressed to my management. 
They, however, gave me a free hand, and I now went to see the oldest 
of the five Ullstein brothers. He objected that one should k^ep the 
editorial and the advertisement sections separate. I answered this 
objection with the following parable: 

‘You advertise on all hoardings in Berlin with the slogan “Read 
the BerlinerMorgenpost Would you still do so if under every poster 
advertising your paper there was another one which read “The 
Morgenpost is Berlin's worst newspaper"? You can hardly expect 
the Bank of Dresden to recommend a new issue in your advertise- 
ment section if this new issue is represented as inferior in the editorial 

Ullsteins could not deny such simple logic. My efforts were 
successful This little story highlights one of the most portentous 
problems of the newspaper industry, because it exhibits the conflict 
between advertising and editorial policy. I do not wish to imply 
that Ullsteins gave way for financial reasons. My logic would 
surely have had some influence on them. No one has ever had any 
cause to object to factual and reasoned criticism, provided it is 
free from caprice and malevolence. Confidence and credit, these 
are the mainstays of the monetary system. They must not be 
wantonly or negligently jeopardised. And to permit criticism to 
depend on financial interests is naturally even worse. 

I soon came to realise that I would never comprehend the meaning 
and essence of the banking business unless I learned to master its 
working tools. The management of accounts, the discounting of 
bills of exchange, the calculation of interest, the determination of 



exchange rates, arbitrage in foreign bills and securities, the giro 
system, the handling of cheques, the administration of securities, 
the floating of new issues - I felt I had to get to know all this and 
much else at first hand. Therefore, I asked the management for 
permission to work my way through all the departments of the 
bank as if I were an apprentice. Permission was granted, on con- 
dition that I would use my free time, that is before and after bank 
opening hours and the lunch hour, to perform my existing duties, 
and provided that these duties would not suffer as a result of my 
other activities. 

Naturally by now there was more’ to my publicity duties than 
merely remaining in touch with the press. All banks - and thus 
the Bank of Dresden coo - had archives. Stored here, and always 
kept up to date, were balance sheets, reports, newspaper cuttings etc 
relating to the general economic situation and to companies and 
other enterprises at home and abroad about which a banker had to 
keep himself informed, because they either were or could become 
his clients. Since keeping such archives is a purely mechanical 
operation, the employees entrusted with this task were not parti- 
cularly well educated. Nonetheless, the evaluation of such material 
requires understanding and initiative. Hitherto the Bank of Dresden 
could not spare such qualities for this task. 

The mechanical task of assembling the archives was in the hands 
of an elderly gentleman, who certainly had no great knowledge of 
economics, but who was most conscientious. He saw his task as 
the peak of intellectual activity, and let no one impugn the impor- 
tance and significance of his position. Because I did nothing to rob 
this orderly and characteristically decent man of his office or his 
dignity, we were on very good terms. 

Yet I was not content with a purely mechanical collecting of items * 
of information which served only for occasional reference. I sought 
to extract something from these archives which would be usable 
as publicity for the bank, as well as provide valuable material for 
instructing the bank’s powers-that-be in the salient facts of economic 
life. As a student in Paris I had seen a model in the offices of Credit 
Lyonnais of which I now made use. Once a week, and even daily 



when necessary, I compiled a bulletin for the directors and depart- 
mental managers dealing with and commenting upon the most 
important economic events of the day. Very soon the distribution 
of this bulletin was extended to the bank’s clients, and, by including 
a monthly survey on the economic situation with all the bank’s 
outgoing letters, my bulletin also reached those whose custom the 
bank was seeking to obtain. Today, every client is showered with 
such bulletins by his bank: then, it was something new which was 
soon imitated. 

Now I was entrusted with an additional task which stimulated 
my energies, and gave me so much pleasure that I did not relinquish 
it during the entire time I spent with the Bank of Dresden. If one 
wished to introduce shares or bonds onto the capital market, it was 
essential to obtain an appropriate quotation on the stock exchange. 
Because it makes the purchase and resale of securities possible at 
any time at a rate officially fixed by the stock exchange, such a 
quotation is indispensable to the success of a placing. 

By law, admission to official dealing on the stock exchange was 
dependent on the approval of a stock exchange committee which 
had the task of ascertaining whether the issue of securities concerned 
was sound and worthy of confidence. The most respected members 
of the stock exchange sat on this committee, and one of their number 
acted as assessor for each application. The examination was made 
on the basis of a prospectus which contained all the necessary details 
of the concern or public corporation which wished to avail itself 
of the stock exchange's capital market. The submission of such a 
prospectus was usually carried out by the bank which undertook 
the financing of the concern or public corporation. The task 
of preparing the prospectus was therefore undertaken by tire bank. 
To this end it obtained all the details necessary' to make an assessment 
from the concern seeking finance, and incorporated these details 
in the prospectus. This necessitated extremely involved conferences, 
negotiations, discussions and critical reviews with those concerned 
in the new issue. 

This task was entrusted to me, and it gave me the opportunity 
to become closely acquainted with the internal organisation of 



innumerable concerns and public corporations, both at home and 
abroad. My ability to judge credit-worthiness made great progress 
as a result. I had a hand in the preparation of every prospectus 
which was produced during my thirteen years with the Bank of 
Dresden. Not only was it necessary to compile the prospectus, it 
also had to be represented and vouched for during the examination 
by the assessor. My activities in this field soon led to smaller banking 
firms asking me for advice and help in the preparation of their 
prospectuses, and to my being co-opted as member of the stock 
exchange new issues committee. 

Despite this growth in my activities I had time on my hands. I 
therefore made use of the permission granted me, and for a whole 
year went through all die departments of the bank as a crash course 
apprentice. I performed my duties in the field of political economy 
in the morning, lunchtime and outside banking hours. In that year 
my family did not see much of me. Nor can I say that I became a 
fully-fledged banker as a result of this crash course, but I did learn 
everything which forms part of banking activity. From here on no 
one could pull the wool over my eyes, and I knew how and where 
money and credit problems had to be tackled. 

Amongst the most amusing and perhaps also the most instructive 
experiences of my apprenticeship were visits to the stock exchange. 
My attitude towards this institution was naive in the extreme. 
Day in and day out the most important theme of conversation 
amongst the employees of the bank was the stock exchange prices. 
It was not difficult to form the impression that this theme lay at the 
heart of the banking system. I began my encounter with the 
stock exchange in great awe. The first superficial impression 
was also extremely favourable. The Berlin stock exchange was 
an imposing building. During the noon hours hundreds of commo- 
dity and security dealers gathered in its three large halls. On busy 
days they crowded, loud and gesticulating, round the enclosures in the 
centre of the halls, behind which the accredited brokers calculated 
the quotations according to supply and demand. 

When busin ess was slack, the time was passed with jokes and gossip. 
And it was customary to pull a new arrival’s leg, or to play some 



practical joke on him. Thus, for instance, a label with some silly 
inscription was fastened to the back of his suit. I, too, was not 
spared this tomfoolery. When, on one of my first days, I stood in the 
crush in front of the enclosures, I suddenly felt a slight tickling on 
the back of my neck. Like lightning I turned round, grasped one 
of the men behind me by the chin, and shook his head. The general 
laughter proved to me that I had caught the right person. After 
that I found that the stock exchange people accepted me as one of 

The stock exchange is a much-needed market where the money 
necessary for day-to-day business requirements is distributed, and 
where the long-term financing of business enterprises is made possible 
and promoted by the traffic in shares, bonds and other securities. 
A less attractive side of the stock exchange is that it fosters specula- 
tions not always motivated by rational considerations, and often 
seduces the inexperienced into permitting themselves to be influenced 
into fanciful or unthought-out paths. 

It was thanks to my apprentice year that I was immediately after- 
wards accepted for duties on the regular practical side of banking. 
The department devoted to economic affairs, however, remained 
under my control. At the age of thirty-two I was promoted to 
branch management, and this appointment greatly increased' my 
insight into the German economy, since I then had to make frequent 
visits to other bank branches, each with its own problems. 



Confidence in one's business partner plays a decisive role both in 
transmitting payment from place to place, and in the mutual 
interaction between the parties to a large-scale credit arrangement. 
In the Middle Ages the transport of effective moneys was extremely 
difficult, not only for technical reasons, but also on grounds of 
security. For this reason a system of surety by letter of credit came 
into being. A banker in one town gave a client who needed money 
in another town a letter to a banker in that town who, when the 
letter was presented, gave the client the required money and charged 
it to the letter-writer’s account. The same thing happened in the 
opposite direction, and the balance was settled on a suitable occasion. 
Such a money and credit arrangement was possible only if the two 
bankers could trust each other. Thus from the very beginning of 
the modem banking system a close network of relationships and 
friendships between many private firms was essential. The Roths- 
child family, its five brothers each resident in one of Europe’s 
business centres, provides a good example. 

It is true that with the rise of banks as public companies such 
personal business friendships lost some of their significance; but 
human relationships are still extremely valuable. In the case of the 
joint stock banks it is of course no longer personal influence which 
forms the basis of confidence. International law however remains as 
significant as ever. The legal protection afforded by British pre- 
ponderancy in world trade w r a s, before the two world wars, an 
important factor contributing to the frictionless functioning of the 
international payments traffic. 




The payment of savings and cash receipts into a bank requires a 
great deal of confidence, a confidence which is engendered by die 
fact that the joint stock banks are endowed with large capital funds 
of their own. Here personal relations play hardly any role. But in 
the granting of credit, the negotiation of loans, and similar trans- 
actions, personal factors still have a part to play. In the spring of 
1916 1 left the Bank of Dresden and joined the board of the National- 
bank fur Deutschland (National Bank of Germany). Soon after- 
wards an industrial tycoon, whom I had got to know as a client 
of the Bank of Dresden, came to me to do business. I asked him why 
he had not taken his custom to the Bank of Dresden, and received 
the reply that he had in the course of previous dealings with the 
Bank of Dresden kept an eye on me, and that as a result he had 
confidence in me. The leaders of large industrial undertakings and the 
leaders of the big banks also on intimate terms, have full con- 
fidence in each other. Their relationships extend over a wide field, 
and have been developed through constant contact over the years 
and decades. 

Already in my apprentice years, when I was engaged as economic 
syndic in an association representing the commercial interests of 
German industry, I had the good fortune to meet many of the 
personalities prominent in the German economy. My most valuable 
relationship was that with Georg von Siemens, manager of the 
Deutsche Bank, with whom I was in daily working contact for a 
whole year. Georg von Siemens had become a banker without 
ever having served a banker’s apprenticeship. He too was no 
banking technician. He once remarked that to start with he had not 
known what the most commonly used stock exchange phrases 
‘letter’ (offer) and ‘money’ (demand) meant. Siemens was a 
practical political economist of the first rank, who had grasped 
the significance of the banking system in the development of the 
economy. It was he more than anyone who was responsible for the 
close co-operation between the banks and industry. The recognition 
that his task lay in this field prompted him to accept a Reichstag seat. 
In the Reichstag he executed measures of an economic nature which 
often set the trend of German economic policy. By developing 



its branches and deposit accounts, the Deutsche Bank made such 
a success of encouraging people to bank their savings with them, 
that it could use a proportion of these savings to finance long-term 
credits. Siemens applied the principle of life insurance to banking: 
just as all people do not die at once, so too all bank deposits are not 
likely to be encashed at once. This principle can lead to abuse, as 
Siemens discovered when the Bank of Leipzig came to grief. But 
he had courage, and his bank was already strong enough to with- 
stand this first great shock to the modern German banking system 
without the intervention of the Reichsbank, the note-issuing bank. 

In the trade association for wliich I worked I became acquainted 
widi many industrialists as well as with bankers; in the Bank of 
Dresden I got to know many more famous names. Amongst them 
was Rathenau, the founder of the ‘Allgcmeinen Elektrizitats 
Gesellschaft’, Privy Councillor Duisberg, who amalgamated the 
three largest German chemical companies into the so-called I G, 
Adolf Woermann, the Hamburg shipowner, Karl Friedrich von 
Siemens, the chairman of the Siemens concern, Roesicke, the land 
owner, whose brother was general manager of a large Berlin 
brewery, and, last but not least, the two Ruhr giants, Hugo Stinnes 
and August Thyssen, who, together with the Bank of Dresden, 
founded the ‘Saar Und Mosel Bergwerkgesellschaft’. 

Connected with this event is a small anecdote to which I was 
witness. The ‘Saar and Mosel’ was founded with a share capital 
of DM 21 million, of which Thyssen and Stinnes took up 10 
million Marks each, with 1 million DM as the Bank of Dresden’s 
share. The function of the bank was to act as a kind of referee should 
differences arise between the two largest shareholders. After signing 
the contract founding this concern, Thyssen turned to Stinnes: 

'Well, Stinnes, now we must obviously pay in the share capital. 
I have a suggestion to make: I shall issue bills to the value of 10 
million Marks which you will accept, and which the Bank of 
Dresden will discount/ 

‘But Thyssen/ said Stinnes, 'never in my life have I signed an 
accommodation bill’ (later on he was no longer subject to such 


‘In that case I will make another suggestion,’ Thyssen replied, 
‘you issue bills for io million which I will accept.’ 

And this actually happened. The bills were promptly discounted 
by the Bank of Dresden. 

Much as I like making and fostering business friendships, I have 
always disliked party political ties. My upbringing and education 
inclined me to a democratic liberal outlook on public affairs. But 
I took no pleasure in party political activities. It is nonetheless true 
that for a few years in my youth I had party political connections, 
spoke at public meetings and participated in public discussions. 
When, in the elections of January 1919, after Germany’s defeat in 
the First World War, there was the danger that the Social Democrats 
would gain a parliamentary majority, I collaborated in the founding 
of the German Democratic party and made speeches on its behalf. 
I found satisfaction in die fact that despite defeat in war and the 
unrest which accompanied it in many parts of Germany, many 
left-inclined voters supported not the Social Democrats, but our 
party, which represented the views of the middle-class left. These 
voters, too, had doubts about giving the hide-bound socialists a 
Reichstag majority. The party gained seventy Reichstag seats and 
held the balance of power. After the election I very quickly withdrew 
from the party, and from political activity. The clique system, and 
the strong ascendancy of personal ambition, spoilt my appetite 
for aedve collaboration. The leaders of the party took only fourteen 
years to reduce its number of seats from 70 to 5. 

In assisting in founding the party I never sought a seat for myself. 
Already, by the time I was twenty-six, I had refused an offer of a 
safe seat. And when in the ’twenties Stresemann’s party asked me 
to be a candidate, I declined. My striving was for positive action 
in the general interest in the field of political economy. I considered 
my activity as a banker to be more conducive to this end than party 
politics in parliament. In 1948, having at last escaped political 
persecution, I once more had to decline offers from three popular 
parties which sought my services as a candidate. 

It was not long before I had the opportunity to add foreign con- 



nections to those I had forged at home. In the summer of 1905 
our manager Schuster took a business trip to the United States, 
and asked me if I would like to accompany him as secretary. I was 
very glad to accept his invitation. Even on the ship I made new 
acquaintances. Naturally they were not all business people. Amongst 
the passengers were one Italian and two German tenors journeying 
to America for public engagements. The Italian was Caruso, 
already world famous: a charming, rather reticent companion, 
who participated unassumingly in our games on board. 

In New York the business connections of the Bank of Dresden 
took us to Morgan & Co, then one of the foremost finance houses, 
where the two of us established our headquarters. Here I became 
acquainted with a large number of American bankers and bank 
managers. None of them made a greater impression on me than the 
head of the house, the old John Pierpoint Morgan, who regularly 
invited Schuster and me to take lunch with him. For a whole week 
I was able to participate in the discussions which were dominated 
by Morgan’s superb intellect. In those days the firm still occupied 
the old low corner building in Wall Street which has now been 
replaced by a modern skyscraper. The executive office, situated on 
the ground floor, was separated from the remaining offices by 
shoulder-high glass walls. There was no question of a solemn 
announcement of visitors, no question of waiting rooms and ante 
chambers. Everyone had access to the chief’s desk, provided only 
that he was free; the glass screens permitted everyone to see if this 
was the case. Relations between chief and employees were friendly 
and informal without respect suffering. 

When in 1924 I made my first visit to Mussolini in Rome, I had 
occasion to recollect the simplicity of J. P. Morgan, in his time the 
most important of America’s banking chiefs. Before meeting 
Mussolini, I was first led into a waiting room. Two minutes later 
someone arrived who took me to another waiting room. After a 
further two minutes I was taken to yet a third waiting room. Then 
at last I was permitted to enter the room in which the head of the 
Italian state was at work. It was an unusually large room with its 
entrance in one comer and the large writing table behind which 



Mussolini reigned some twenty or thirty steps away in the far 
corner of the room. J. P. Morgan was able to do without such 
artificial aids to his standing and dignity. 

I doubt if anyone who sat round Morgan’s table at that time is 
still alive today. I last saw Morgan’s son Jack in 1930 in The Hague, 
where he was staying as a member of the Young committee. Thomas 
Lamont, a most imposing figure, I last saw in 1933 in Heidelberg, 
where we discussed the question of annuity payments on the 
Dawes-Young loan. Charming though he was, Morgan’s son Jack, 
with whom I collaborated for four months during the Young 
conference in Paris in the spring of 1929, did not approach his father’s 
intellectual heights. One of old Morgan’s utterances has always 
remained fresh in my mind. I once asked him to what he ascribed 
the fabulous rise of his house. He replied, ‘To the fact that I always 
believed in the economic future of my country.’ 

On my first free Sunday in New York I made a journey to the 
Niagara Falls, which were then regarded as one of the world’s 
greatest natural wonders. Lack of time prevented me from visiting 
the even more interesting American West. Not until later, when 1 
went to visit the founder of the Bank of America, the Italian 
Giannini, in San Francisco, did I get to know this part of the world. 
In the course of this first journey to America I also made a short 
business trip to Toronto. A brief stay in Washington became an 
important event, because I was able to accompany Schuster on a 
visit to the President, Theodore Roosevelt. 

Is it not strange how certain events in life are inter-linked? 
Shortly after seeing the Niagara Falls, I was concerned with a 
project for the utilisation of the much more impressive Victoria 
Falls in southern Africa, and 28 years after visiting Teddy I sat 
opposite his nephew Franklin Delano Roosevelt, as representative 
of the German government. (I represented the German interests at 
the London world economic conference.) 

The African project provided for the utilisation of the Victoria Falls 
by means of a gigantic electric power station on the Witwatersrand. 
A company had been formed in England with the aim of utilising 
the enormous water power potential of the Zambesi. The AEG 



in Berlin was asked to investigate the project. It found that the 
construction of a generating plant at the Victoria Falls with cable 
lines to transport electric power to the mining districts of Johannes- 
burg would prove unprofitable. On the other hand, the exploitation 
of the vast coalfield on theWitwatersrand by means of a coal-fired 
electric generating plant promised to be economically successful. 
The company founded in England under the name of the ‘Victoria 
Falls Power Company’ therefore entered into a contract with the 
AEG for the erection of a power station utilising theWitwatersrand 
coal. The company retained its attractive-sounding name as a lure 
for future shareholders. The capital required to build the power 
station was raised in Germany by means of a loan floated by the 
Bank of Dresden. Part of this loan was used to pay the AEG for its 
work. The company prospered and is still in existence, operating 
on a much larger and highly profitable scale, while vast quantities 
of water continue to cascade down into the depths below the 
Victoria Falls, unharnessed as ever. 

The contacts which I made in New York and London also stood 
me in good stead at a later date in my public life. My connections 
in Paris (I had spent one term there during my student days, 
including some time in the economic section of the Credit Lyonnais, 
where as an insignificant student I did not get to meet the chief) 
were not very strong, and it was only much later that I came to know 
France’s leading bankers. 

My experience of banking was now far-reaching and illuminating. 
The technical process of dealing with money is not the crucial 
factor in banking, it is merely a tool. It is the background which is 
crucial. With money the Bank of Dresden built railways in Brazil, 
power stations in South Africa; it financed municipalities and states 
both at home and abroad. With money it equipped industries and 
commercial undertakings. Each year it invested hundreds of millions 
of Marks, and thus sums greatly in excess of its own share capital. 
Where did this money come from? 

In the beginning bankers lent and invested only their own money. 
The extent of their business found its limit in their own resources. 


With today’s joint stock banks things are different. They attract 
money deposits from die public and employ these deposits in their 
business. The majority of these deposits are on current account, 
and can be withdrawn at a moment’s notice, a portion are lodged 
with the bank on the longer term. The bank must therefore take care 
to employ the money deposited with it in such a way that it is 
always in a position to make repayment of deposits whenever they 
become due. The responsibility of a bank does not therefore stop 
at ensuring that its deposits are kept secure, but also includes making 
sure that the due date of its own loans and investments corresponds 
with the date on which deposits are due to be recalled. Availability 
of capital deposits, or liquidity, is of the greatest importance for the 
banking system. Short term deposits must be lent or invested only 
in the short term. A bank knows from experience that not all 
deposits will be encashed at the same time, a fact which allows it a 
certain leeway. Essential for a bank’s liquidity is that it should be 
able to fall back on the central bank. The most liquid and most 
remunerative investment available to a bank is the commercial 
bill, which is as a rule repayable in a period not exceeding three 
months, while its security and negotiability is assured by special 
laws. The main business of the note-issuing bank is to purchase 
such bills when the banks need money, so that the banks possessing 
the appropriate number of bills can always obtain money from the 
central bank. 

Next to liquidity, the crucial question is that of security of the 
capital deposits. Bills which the bank accepts must be good; 
credits given by the bank must be safe; investments made by the 
bank must be profitable. The customer’s liquidity is a precondition 
of the bank’s liquidity. Only when these conditions are satisfied 
will the central bank be in a position to help, should a bank run into 
liquidity- or payments-difficulties because of changes in business 
activity or wrong decisions. In my time with the Reichsbank I 
experienced cases of wrong decisions which underlined drastically 
the truth of these words. 

When in the spring of 1925 I returned from the holiday which I 
had permitted myself after the Mark had finally been stabilised, 



I had a visit from the heir to the great Hugo Stinnes concern, the 
founder of which had died the previous year. Young Stinnes 
showed me his books, which indicated a great fortune, but also a 
large indebtedness. Stinnes confessed to me that he was obliged 
to settle bills of exchange to the value of ninety million Marks drawn 
on London within fourteen days, and that he did not have the means 
to do so. The bills were expressed in Pounds Sterling. This confession 
not only astonished me, but it also gave me cause for great concern. 
I had only just managed to stabilise the Reichsmark and succeeded 
in amassing a reasonable find of gold and foreign exchange, a 
stock which would be sadly depleted by a withdrawal of ninety 
million Marks. Yet I could hardly leave the firm with payment 
difficulties. Moreover, the doubts about the stability of the Reichs- 
mark could well have been rewakened by a default. For me, as 
president of the Reichsbank, this latter point was decisive. 

‘If, 1 1 said, ‘the only way to maintain your property intact was to get 
so deeply into debt, then it was absolutely necessary for you to 
realise some of your assets, and to bring about a condition of 
liquidity which would have enabled you to avoid getting yourself 
into the embarrassing position in which you now find yourself. 
It was moreover most improper of you to have incurred so large 
an indebtedness in a foreign currency. To pay out ninety million 
Marks in Pounds Sterling today - a year after the stabilisation - 
is not a trivial matter, not even for the Reichsbank.’ 

But I had to swallow the bitter pill. I called a meeting of the 
big banks, and prevailed upon them to grant Stinnes a credit of 
ninety million Marks, while the Reichsbank would make the ninety 
million available in Pounds Sterling when they fell due in London. 
At the same time I left it to the banks to collaborate with Stinnes 
in the sale of some of his assets, so that the concern might regain 
its liquidity. The only good which came out of this affair was that 
the esteem accorded to Reichsbank and the German currency in the 
City of London was greatly augmented. 

The control of the Stinnes crisis was accomplished without 
attracting a great deal of public attention, so that unfavourable 
psychological reactions were avoided. This also happened in another 



case which was cleared up without causing a public scandal. In 1929 
the FAVAG (Frankfurt General Assurance Company) got itself 
into financial difficulties. It had raised considerable amounts of 
credit on the London capital market, and had been unable to honour 
its debts as a result of unsuccessful speculations. On a visit to London 
I had a conversation with Baron Schroeder, the head of the German- 
English banking house, in the course of which we had the following 
amusing and instructive dialogue: 

‘Well, Mr Schacht, I rely on you as president of the Reichsbank 
to see to it that at all events I do not lose any money with FAVAG 
and that 1 get my loans repaid.’ 

I affected great surprise and replied coolly: 

‘But, Baron, up to now I was always under the impression that 
assurance companies do not borrow money, but on the contrary 
lend it. I cannot understand on what grounds you lent money to 
FAVAG. And perhaps you will permit me to ask how much 
interest and commission you are charging on these loans?’ 

‘Including commission, I reckon on between eight and nine per 

‘And what percentage would you have earned had you loaned the 
money in England ?’ 

‘About four per cent.’ 

‘Then, Baron, I trust you will deduct the five per cent overpaid in 
interest on the loan from the amount outstanding, and declare 
yourself satisfied with a correspondingly lower repayment.’ 

Fortunately, the FAVAG case was resolved without evil conse- 
quences because the German Allianz Versicherungs AG (Alliance 
Insurance Co) took over FAVAG with all its assets and liabilities. 
I have mentioned this incident here because it provides a typical 
example of the fact that in granting a loan the responsibility is 
not always entirely that of the borrower, a great deal of responsi- 
bility is also with the lender. 

I frequently harked back to this fact in the years between 1924 and 
1930 when American and other foreign bankers and banks granted 
Germany countless loans without properly investigating and 



evaluating the possibilities of repayment. The reason for granting 
these credits was not so much the endeavour to help the German 
economy to its feet after its defeat in war - it is well known that 
there is nothing cosy about money matters - but rather the profitable 
business of placing German loan issues on the American market. 
The error made in granting excessive credit lay in the fact that the 
loans were not always used to further the economy, but sometimes 
to defray the cost ot outlays which had no direct productive result. 
Besides reparations, such outlays included particularly the amounts 
spent on public building, social institutions and similar works. 

A further error lay in the fact that interest on and repayment of 
the loans was due not in German Marks, but in Dollars or other 
foreign currencies. This would have been possible only if Germany 
could have obtained the necessity surplus of foreign exchange through 
industrial exports, which was not the case. In constantly repeated 
public exhortations I warned both the German borrowers and the 
foreign lenders against the clangers of this course, always without 
avail. That did not prevent my being inundated with reproaches, 
and being blamed for Germany’s inability to pay, when disaster in 
due course occurred. A just verdict on these foreign loans would 
show that the responsibility of the lenders was at least as great if not 
greater than that of the borrowers. 

Strangely enough, the criticisms and reproaches levelled at me 
came less from abroad than from political circles at home, which 
would have fared far better had they heeded my warnings. In 
particular, Social Democratic parliamentarians who had previously 
spumed my warnings took an active part in these criticisms. This 
rejection of my advice largely contributed to my resigning from my 
post as president of the Reichsbank in 1930. These cases of erroneous 
granting of credit show that lenders too can be wrong. Both 
parties failed to evaluate the situation properly. 

There is even less excuse for a widespread abuse which took place 
in the spring of 1927. The cautionary example of the consequences 
of excessive foreign indebtedness did not prevent the German 
banks from continuing to employ short-term foreign loans in their 
business. Not only was this bad management on the part of the 


individual banks, but the overseas indebtedness was also a burden 
on the Reichsbank’s stock of foreign exchange, because it was 
payable in foreign currency. Stinnes and FAVAG did not have 
sufficient means to settle their debts when they fell due, irrespective 
of whether payment was due in German or in foreign currency. 
Had these debts been incurred in German currency, the Reichsbank 
would not have had the least difficulty in coming to the rescue, 
because in both cases it was not a matter of being unable to pay, 
but merely one of lack of liquidity. Because these debts were 
incurred in a foreign currency the federal bank’s reserve of foreign 
currency was depleted. The exchange rate of the Mark was in its 
turn strongly influenced by, if not dependent on, the care and preser- 
vation of this reserve. Perhaps the prompt settlement of the Stinnes 
foreign debt even served to reinforce the banks in their assumption 
that they could at any time obtain sufficient foreign currency from 
the Reichsbank. Be that as it may, the banks without the slightest 
hesitation continued to raise loans abroad and to use the resulting 
funds for their current transactions. 

Consequently, I had confidential talks with a number of bank 
directors to ascertain what quantities of short-term moneys they 
had borrowed from banking associates abroad. My inquiries 
revealed so considerable a sum that I was impelled to give a most 
dire warning, particularly since a large portion of these foreign 
loans was being used to grant credits to customers for the stocks 
and shares dealt in by the banks, who in their turn used these credits 
for stock exchange speculation. While I could manage to summon 
up some degree of comprehension for the desire of the banks to help 
German industry by means of loans financed with short-term 
moneys raised abroad, I simply failed to understand why the proceeds 
of foreign loans should be made available for speculative purchases 
of securities on the stock exchange. It struck me as monstrous that 
stock exchange speculation should be kindled and stoked by means 
of foreign loans at the expense of the Reichsbank’s reserves of 
foreign currency. After I had repeatedly exhorted a large number 
of bank directors to put an end to this mischief, the Reichsbank 
instructed the banks to ensure that their customers’ purchasing 



orders should be secured by a corresponding cash deposit, and that 
purchases made purely on credit should be disallowed. On one 
occasion the Reichsbank even went so far as to exclude from its 
clearing house activity one of the big banks which had not obeyed 
the Reichsbank’s instructions - a move which brought, it to its 
senses within a few days. 

However, since such individual measures did not have the desired 
effect, the central bank in May 1927 insisted that the banks instigate 
a drastic restriction of credit to customers for securities. The Reichs- 
bank had to retain control over its reserves of foreign currency and 
gold, and could not leave them at the mercy of the lack of compre- 
hension and the egoistic business interests of the banks. This 
regulative measure led to a major fall in stock exchange prices on 
13 May, 1927, a day which was henceforth to be known as ‘Black 
Friday’ in the annals of die Berlin stock exchange. Fortunately 
this brought about a considerable reduction in speculation, and 
contributed to die fact that the crash on the New York stock 
exchange, which took place two years later, had a less severe effect 
on the German stock market than it would have, had speculation 
been given free rein. Another factor which contributed to lessening 
die crisis was that some of the big banks were impelled by the 
Reichsbank’s intervention to reach an agreement with their foreign 
loan-granting banking friends, whereby a portion of the short- 
term credits were consolidated for a number of years. 

In my discussions with the bank directors I always pointed out that 
Germany was by no means in a position to honour its great obligations 
under the Dawes plan on its own. At every opportunity I tried to 
bring home to the banks, and also to the government, that the pay- 
ments which had to be made to foreign countries under the Dawes plan 
were not, as the Dawes plan expected and required, effected out 
of export surpluses, but solely and entirely out of a portion of the . 
foreign loans which flowed into Germany, particularly from 
America. Between the wars Germany had rarely achieved any 
export surpluses, and then only very small ones. I therefore always 
fought for the greatest possible reduction in the loans raised abroad, 
because I placed the responsibilities of Germany as a borrower 



just as high as the responsibilities of* the foreign issuing banks 
as lenders. 

Within two years of the coming into force of the Dawes plan, 
Germany had already taken up long-term loans from abroad to the 
value of 3^ billion Marks. Insofar as these foreign moneys served 
to further the efficiency of German industry, enabling it to cam 
foreign exchange through exports, earnings which would then be 
used to pay interest on and repay the loans, all was well. But these 
foreign loans became grave in their consequences if their equivalent 
value was used for local political purposes by the state, provincial, 
or local government. Such use did not create the means to pay 
interest on and repay the loan. Here, as so often both before and 
since, politics made the error of leaving social and economic conse- 
quences out of account. The battle for votes impelled all parties 
without exception, but especially those of the left, to let as much 
foreign money as possible into the country, in order to create 
cultural and social comforts for the people. How nonsensical 
were the conceptions about these things which prevailed in certain 
provincial governments can be seen from the fact that towards 
the end of 1924 one German state planned in all seriousness to raise 
a foreign loan amounting to 100 Reichsmark per head of population. 
Had the rest of the Reich followed suit, this would have added up to 
an amount of six billion Reichsmark. 

After this incident the Reich Ministry of Finance convened an 
advisory committee for foreign credits. It began its operations in 
January 1925, and for a number of months succeeded in slowing 
down the rate at which foreign loans were raised. However, this 
committee did not have all the authority which the Reichsbank 
would have liked it to have. While in New York in the autumn 
of 1925 I had the opportunity of alerting the American authorities 
to the dangers of granting too much credit to Germany. My efforts 
came to grief because the American bankers had an insatiable 
appetite for business, and continued to offer German borrowers new 

When at the end of 1929 the New York stock exchange crash put 
an end to the granting of loans, Germany had, within six years, 



borrowed some 20 billion Marks from abroad. This was exactly as 
much as the United States of America had used in its development 
over the previous forty years. Even if the bankers did not see it, the 
American public became aware that great danger was inherent in 
the loans granted to Germany. The failure of the Young loan at 
the end of 1930 provided striking proof of this fact. It was not 
long before Germany had to declare itself unable to pay the annual 
interest on foreign loans. Despite the Hoover Moratorium of June 
193 1, the German bank crash came in July 1931. 

In recent times there have once again been some business failures 
for which not only the borrowers, but also the lenders, are to blame. 
I refer to the case of Schlieker in Hamburg, and the case of Krages 
in Bremen. It is beyond dispute that Schlieker undertook to con- 
struct a wharf which was in every respect the most modem of its 
kind, and which also promised to be profitable. Schlieker was on 
the right road, both from the technical and from the organisational 
point of view, but he lacked financial wisdom. In taking delivery 
of his materials he incurred considerable credits with large industrial 
firms, amongst them a nationalised undertaking. The suppliers 
should have investigated and taken cognisance of the amount 
and period of credit which would be required before the wharf 
was completed. This obligation lay just as heavily upon them 
as on Mr Schlieker. Both failed in their responsibilities. The 
creditors then withdrew their credit in the middle of the con- 
structional work, thus bringing about the downfall of the enterprise. 

While in the case of Schlieker we are dealing with a capable 
industrial entrepreneur, Krages was a stock exchange speculator 
who certainly does not deserve our sympathies. He raised loans 
from countless banks, and used them solely for large speculative 
stock exchange transactions. There was no question here of any 
social or political ends, merely the striving for personal gain and 
personal influence. If one admits there is no excuse for Krages, 
one must also wonder why so many banks acceded to Krages* s 
request for credit, although it was generally known how the money 
would be used, and although it was easy to ascertain the total 
extent of his indebtedness. 


The behaviour of the banking authorities in the case of Krages 
remains inexplicable. From the bank reports which reached them 
each month, the supervisory authority knew the volume of out- 
standing credits, and thus had the opportunity, not to say the 
responsibility, to draw attention to the Krages operations. 

The bank supervisory authority owes its existence to a law which 
I instigated when I was Minister of Economic Affairs in 1934. 
National Socialist agitators led by Gottfried Feder had carried on a 
vicious campaign against private banking and against our entire 
currency system. Nationalisation of banks, abolition of bondage 
to interest payments, and introduction of state Giro ‘Feder’ money, 
these were the high-sounding phrases of a pressure group which 
aimed at die overthrow of our money and banking system. To 
keep this nonsense in check the president of the Reichsbank called 
a bankers’ council which made suggestions for tighter supervision 
and control over the banks. These suggestions were codified in the 
law of 1934, which was strengthened in 1957 by increasing the 
powers of the bank supervisory authority. 

In the course of several discussions, I succeeded in dissuading 
Hitler from putting into practice the most foolish and dangerous 
of the ideas on banking and currency harboured by his party 
colleagues. Adolf Weber, the recently deceased doyen of German 
high school teachers of economics, confirmed this in a statement 
made to the Ludwigsburg de-nazification tribunal. His deposition 
is the more remarkable because he was not asked by me to testify 
in my favour, but was called by my accusers to give evidence 
against me. The reason for this was probably the fact that Weber 
had once published a short lecture in which he attacked me on the 
question of our foreign debts. My accusers, who had not troubled 
to acquaint themselves with the full facts, were bitterly disappointed. 
Weber recalled that even by the end of March, 1933, Hitler had 
explained to the Reichstag ‘In principle, the German government 
will safeguard the interests of the German people, not by means of a 
state-organised bureaucracy, but by means of the greatest possible 
furtherance of private enterprise and respect for private property’. 
Adolf Weber commented that ‘parts of this and some other utter- 


ances sometimes recall almost word for word the “fundamentals 
of German economic policy” which Schacht had promulgated a year 

It is not without a certain irony that at a later date an attempt was 
made to apply to me the very bank supervisory law which was 
passed at my instance. I had lost my entire fortune as a consequence 
of the Second World War, and the judicial persecution perpetrated 
against me by Hider, international military tribunals and German 
de-nazification Courts, prevented me from doing anything to 
preserve my savings. When I was . at last heed from political 
persecution, 1 was therefore forced to look for a way of earning my 

What then was left to me after my return from Indonesia - where 
I was for a time active in an advisory capacity - except to . revert 
to my profession as banker? In 1952 I asked the Social Democratic 
Finance Senator Dudek in my home town of Hamburg whether 
I could count on being permitted to work for a banking firm. With 
great warmth Senator Dudek answered this question in the affirma- 
tive. However, when I then applied to the Socialist government 
for permission to open a banking business, my application was 
turned down, despite Mr Dudek’s assent. I was compelled to take 
legal action against the Senate, which justified its refusal by alleging 
that my business morality was found wanting. It referred in this 
context to the financial methods which I had used to reinvigorate 
the German economy when in 1934 I was re-appointed president 
of the Reichsbank. I shall come back to this method, here I will 
only say that it consisted in the discounting by the Reichsbank of 
bills which granted industry credit over a term of five years. The 
Reich itself guaranteed repayment. 

I won the case against the Senate in both the first and second 
hearings. .My colleagues on the board of the Reichsbank and I were 
always of the opinion that the Reichsbank had an obligation to 
cater for and consider all aspects of economic life. All members 
were imbued -with this responsibility, and I look back with satis- 
faction on the fact that in all the time I was president of the Reichs- 
bank every decision by the board was reached unanimously. • 



Managing a bank is not a mechanical activity which can be exer- 
cised according to fixed rules and regulations. It demands a feeling 
of responsibility for the economic health of the commonwealth. 
It requires a capacity for making decisions, and courage. It necessi- 
tates unusual insight into unusual situations, and, where necessary, 
unusual measures. 



Even in those days the Bank of Dresden and all the other big 
banks had amongst their clients a large number of trading firms 
engaged in import and export. Such clients needed credit for the 
purchase of foreign raw materials and foodstuffs, as well as for the 
sale of producer and consumer goods. These requirements are 
usually met by banks partly through their own foreign branches or 
agents, and partly through banks with which they have friendly 
arrangements. In this respect Germany was, and still is, far behind 
the other industrial countries. Although widi the growth in German 
foreign trade the Mark has grown in significance as an international 
means of payment, the German banks have been very tardy in 
developing a network of foreign branches. For many decades 
Great Britain occupied the top position in the international banking 
world. It had the oldest tradition in international trade. The Pound 
Sterling was the most acceptable, most versatile trading currency. 
In the course of time France and the United States of America 
began to challenge Britain’s preponderance. Today the American 
Dollar has outpaced the Pound as an international means of payment. 

If we examine the great banking houses of America, England, 
and France, we find that the Bank of America has it own establish- 
ments and agencies in more than twenty-five foreign countries. 
Barclays Bank of London operates in more than forty countries 
and has some 1400 foreign branches, while the Credit Lyonnais also 
has branches and agencies in more than forty countries. 

Before the war only two of Germany’s big banks had branches 
abroad. The Deutsche Bank maintained its own branches in London 


A bank’s tasks abroad 


and Constantinople, while the Bank of Dresden had a branch in 
London- In 1886 the Deutsche Bank founded the Deutsche Ubersee- 
bank (German Overseas Bank) as a subsidiary, with establishments 
in Spain and South America. In 1906 the Bank of Dresden followed 
suit by founding the German-South American Bank, which also 
had establishments in South America. Soon after, the Bank of 
Dresden, in conjunction with a number of other banks, founded the 
Deutsche Orientbank with establishments in the Near East. The 
German-Asiatic Bank was founded jointly by all the major German 
banks in 1889. But that was all. 

All these overseas banks, except the Deutsche Orientbank, 
survived both world wars. Where the foreign establishments 
were situated on the territory of the victors they were, it is true, 
expropriated, but they nonetheless continued to operate. One can 
note with satisfaction that the endeavour to found overseas establish- 
ments has recently come to life once again, invigorated by the fact 
that German exports have gained an unexpected momentum in the 
last few years. 

After the First World War, a French group was interested in taking 
over the Orientbank. The negotiations were difficult, because the 
French demanded that the ‘ dossier secret ’ be handed over. When 
asked what they meant by this dossier, it emerged that they meant 
the document which contained certain instructions on how the 
bank made and executed its business. The trouble was that no 
such dossier existed. 

The help of German banks overseas is a vital necessity for German 
export. Such assistance is not merely restricted to the transmission 
of payment and the granting of credit for purchases and deliveries; 
overseas banking establishments are also an excellent means of 
making propaganda and contacts for German exports, and of helping 
to maintain and expand them. Foreign banks give the home industry 
impetus and- assistance by supplying a steady stream of economic 
data, by providing information on clients and on the entire economic 
climate, and also by maintaining contacts with foreign governments 
and other authorities. In addition they open up new avenues for 
the home capital market by acting as mediators in industrial 



investment, in granting loans to industrial and other installations 
and in catering for the general financial needs of credit-worthy 
countries. In almost all cases such investments and loans result in 
orders for the home industry. 

Before the war the foreign banking system contributed consider- 
ably to bringing foreign loans to the German capital market, and 
to the development of enterprises in foreign countries. Naturally 
Germany could not match its older industrial neighbours in this 
respect, yet at the beginning of the First World War German foreign 
investment totalled nearly 30 billion Gold Marks. Germany did a 
great deal to catch up in the forty years of peace between 1871 and 
1914. German enterprise was possessed by an unprecedented urge 
for activity. Industry and science co-operated intensively to make 
all technical advances available to the economy at large. A people 
of poets and thinkers had become a people of explorers and inventors. 

Perhaps it is due to my studies of economics that although my talents 
lay in the world of business, I was always fascinated by the connect- 
ions between science and business, and their significance for the 
development of the national economy. At any rate, already while I 
was with the Bank of Dresden, I felt the need to express my ideas 
on this theme. In 1913, on its fortieth anniversary, the Bank pub- 
lished a brochure which I had written depicting not only the rise 
of my bank, but also the entire economic progress of Germany as a 
whole. This essay under the title ‘Germany's Economic Resources’ 
traced the features of the last forty years, in the course of which a 
continental, still mainly agrarian, Germany had developed into an 
industrial and commercial state, whose tentacles were spreading 
over the entire world. 

The association between science and economics found its most 
fruitful expression in the institution of the Kaiser Wilhelm Society 
for the Promotion of the Sciences which, with support from industry, 
systematically intensified and extended scientific research. The 
Kaiser Wilhelm Society was founded under the special patronage of 
the Kaiser in 191 1. After the collapse of 1945 it changed its name to 
the Max Planck Society. I have been a member of both societies 



since 1926. But, however deserving the name Max Planck, it is 
nonetheless regrettable that the society, which owes its founding 
and much else to Kaiser Wilhelm, should have turned its back on its 
origins and traditions. When, 25 years after its founding, the society 
celebrated its jubilee, I, as Minister of Economic Affairs, was asked 
to give an address. My speech contained the following sentence: 
‘When future ages come to sum up the cultural history of the age of 
Wilhelm II, they will perhaps call this time the age of applied science’. 
Max Planck was then chairman of the society, and shortly after- 
wards he wrote to me ‘Above all you have always shown a deep 
understanding for this special relationship between science and the 
economy which is reflected so clearly in the traditions and organisa- 
tion of our society from its foundation to the present day’. 

Essential for the geographical extension of the German economy 
was the rapid capital formation which enabled Germany to reach 
out beyond its own frontiers and to participate in the economic 
development of other countries and continents. The reaction of 
the foreign press to my essay ‘Germany’s Economic Resources* was 
not always friendly. The rise of a newcomer always rouses envy 
and fear in his competitors. The booklet showed clearly how within 
two decades the European situation had been transformed. Germany 
had become a great power politically and economically. The 
consequence was that England emerged from the ‘splendid isolation’ 
of Victorian times and formed a network of alliances and agree- 
ments directed against Germany. France and Russia armed them- 
selves, financed by French money. It was now Germany which was 
driven into an ‘isolation’ which was everything but ‘splendid’. 

The sum amounting to a billion Marks or more, which Germany 
received annually in revenue from its foreign assets, was an extra 
which was needed to prevent a deficit in Germany’s balance of 
payments. With cyclical variations in the level of foreign trade 
it was not always possible to settle this balance through exporting 
industrial products. Thus the income from foreign investments 
served as a welcome reserve and equalisation fund. The two world 
wars have proved tremendous setbacks to Germany in this respect 



too. Germany’s foreign assets today have not quite reached ten per 
cent of the level existing before the First World War. Since the only 
way Germany can pay for the raw materials essential to its industries 
and for foodstuffs sufficient to feed its populace, is through the 
proceeds from its exports, and since export is never certain without 
investment and installation abroad, the replenishment of Germany’s 
foreign assets is the most pressing task of German trading policies. 
It must always be borne in mind when considering how monetary 
savings are to be employed. 

Foreign assets and overseas loans play a not inconsiderable part in 
politics. He who lends money gains an influence over the economy 
of the borrower, and the economy forms a substantial part of 
politics in general. The fact that the Deutsche Bank undertook 
the financing of the Turkish Baghdad railway at the turn of the 
century was a thorn in England’s side, and increased her envy. Today 
the close connection between money and foreign policies becomes 
especially clear in the so-called development aid for the under- 
developed countries. However great their need for help, such 
countries do their best to eliminate the lender’s political influence 
on their development. They regard every kind of economic 
tutelage as politically suspect and undesirable. 

In the years between the Dawes and the Young plan I experienced a 
noteworthy example of the inter-connection between the monetary 
economy and foreign politics. I represented Germany on both 
committees, and had to familiarise myself in detail with the claims 
made by Germany’s opponents. Amongst these claims was one by 
Belgium. It had not been forgotten that during the period in the 
First World War when Belgium was under German occupation, 
a large number of German Marks had flowed into Belgium, and 
had remained there when the war ended. The Belgian government 
had exchanged German Marks offered to it by the citizenry against 
Belgian currency, and now demanded that Germany should 
exchange these Marks for Belgian or other foreign currency. The 
Dawes committee did not concern itself with this question, because 
the Belgian claim fell outside its brief. Nor was the Y oung committee 



prepared to tackle the matter. The Belgian representative in the 
Dawes committee, M. Franqui, General Manager of the Societe 
Generate de Belgique, the largest Belgian hank, who feared for the 
success of Belgium’s claim, suggested a compromise. In the course 
of a conversation, he mentioned the possibility that - provided 
Germany exchanged the Mark notes - Belgium might be prepared 
to restore to Germany the territory of Eupen-Malmedy, insofar 
as it was German speaking. I had further discussions on this theme 
with the Belgian Minister, Delacroix. The greater part of the 
Belgian press showed itself in favour of the plan, especially the 
conservative Catholic Biert Publique, and the Christian-Democrat 
Standard , and also the Radical-Liberal Derniere Heure and the 
Socialist Peuple . The affair was discussed in a most lively manner 
not only in the Belgian, but also in the French and English press, and 
it was reported that the foreign minister, Vanderfelde, agreed with 
the stabilisation minister, Franqui, about the merits of the plan. On 
21 July, 1926, I received a letter from Mr Delacroix in which he 
informed me that the project had been approved : 

‘The following notice informs you in what terms M Franqui 
reported to his colleagues on the conversation which he had with 
you. The project has been sanctioned.’ 

Of especial interest to Franqui was the fact that a large payment of 
foreign currency by Germany would help the exchange rate of the 
Belgian Franc. But at this point there were many diplomatic 
to-ings and fro-ings, in which the energetic opposition of the French 
President, Poincare, and also of the Belgian military lobby, was 
brought to bear on the Belgian government. It gave in and the 
negotiations failed. 

On the occasion of the Young conference in the spring of 1929 the 
problem arose once more. The Social-Democrat Reichs Chancellor 
Hermann Muller instructed me to negotiate on the newly re-opened 
Mark question with the Belgian Minister Franqui, who was now 
my colleague on the Young committee. My instructions for the 
negotiations were to indicate that while Germany wished to settle 
the Belgian Mark matter, it could do so only in return for a cor- 
responding concession on the part of Belgium. For the form which 



this concession should take I was to refer to the earlier negotiations. 
If Belgian prestige should demand it, the exchange of the German- 
speaking parts of Eupen-Malmedy could be regarded as a re-pur- 
chase of German state ownership in the territory in question. 
Franqui was only too well aware that the previous negotiations had 
foundered on the rock ot Poincare’s opposition, and in addition 
Belgium’s foreign exchange position had changed for the better. 
Once again the negotiations failed on grounds of political prestige. 

The acquisition of territories in exchange for money is, of course, 
nothing new or special in history. In. 1803 the United States of 
America bought the whole Mississippi region now known as 
Louisiana, which had until then belonged to France, and in 1867 
Alaska was purchased from Russia. A later example of the con- 
nection between money and foreign policy concerned me personally 
to a much greater degree than die Belgian-German failure. It is 
well known that after Hitler’s take-over in Austria a large number 
of Jews from Vienna and Budapest managed to escape persecution 
by obtaining permission to emigrate in return for payments to the 
party. They bought their political freedom with substantial amounts 
of foreign exchange. 

After the shameful events of November 1938 which culminated 
in the destruction of the Jewish synagogues, I publicly declared my 
repugnance at these acts of terrorism. In the course of an address 
on the occasion of a pre-Christmas celebration by the employees of 
the Reichsbank at which many party leaders were present I said 
‘The razing of Jewish synagogues, the destruction and pilfering of 
Jewish shops and the maltreatment of Jewish citizens was such an 
outrageous exploit that it must make every decent German blush 
for shame. I hope that not one of you has taken part in these 
misdeeds. If any one of you was involved, then I advise him to leave 
the Reichsbank as quickly as possible. We have no room in the 
Reichsbank for people who do not respect the life, the property 
and the convictions of others. The Reichsbank was built up on 
faith and good will*. 

My attitude makes it plain that I had the strongest desire to find a 
solution to the Jewish question which Hitler would find acceptable. 


A bank’s tasks abroad 

I put it to him that the terrorist treatment meted out to the Jews 
was a political error, and that he ought to use other means if he 
would be rid of the German Jews. I pointed out to him that the 
Reichsbank had estimated the value of Jewish property in Germany 
at around six billion Reichsmark. I' suggested that this Jewish 
property should be administered by an international trust committee, 
and that on the basis of the security of this property at its valuation of 
6 billion, a dollar loan amounting to some i-J billion Reichsmark 
should be raised. Jews all over the world would be invited to 
subscribe to this loan. I thought that the taking up of such a 
billion loan should not prove too difficult for the many well-to-do 
Jews living abroad. Out of the Dollar proceeds of this loan the 
trust committee would give each German Jew who intended to 
emigrate a suitable amount which would enable him to make a new 
life for himself in another country. This would not only serve the 
interests of the emigrating Jews, but also those of countries which 
hesitated to grant entry to penniless Jews. The German Government 
would guarantee payment of interest in Dollars, and undertake to 
repay the loan within 20 years. 

Astonishingly enough Hitler agreed to this suggestion, and 
authorised me to negotiate with my London friends in order to 
ascertain whether such a plan were feasible. Accordingly, early in 
1939 I went to London, and first of all put the plan to Montagu 
Norman, governor of the Bank of England. He approved of my 
proposals, and arranged for me to discuss them with one of London’s 
most prominent Jews, Lord Bearstead, the chief of the well-known 
firm of Samuel & Samuel. He signified his agreement to the plan, but 
remarked that he would have to discuss it with the spiritual leader of 
the London Jews, Chaim Weizmann. Two days later he returned 
to tell me that unfortunately he could not accept my proposal, 
because Weizmann had been vehemently opposed to the plan. 
No reason was given. I had to resign myself to the fact that my 
attempt to give the German Jews their personal and political 
freedom through a financial transaction had failed, although it was 
not even a question of a forced sale, but merely one of an interest- 
bearing loan which would be repaid, and which would also leave the 



Jews with their German property intact. I have never understood 
why my plan was rejected. The fact that Hitler agreed to it shows 
that at that time, at the end of 1938, he was still prepared to reach 
a compromise. Whether the Jews of the world would have been 
in a position to save their German brethren from the fate which 
later overtook them will always remain a debatable point amongst 
people of good will everywhere. The monstrous idea of the ‘Final 
Solution’ obviously came to fruition only at a later date. Even if at 
that time there was no suggestion of such a thing, the desire of 
many Jews to leave Germany was understandable. The refusal 
of the leading Jews to entertain my suggestion led to much 
discussion and dispute in Jewish circles too. 

The incredible misdeeds, cruelties and injustices of the past have 
now made many people conscience-stricken. One result is the 
well-nigh hysterical fervour with which everyone is today striving 
to do his utmost for those countries and people who have hitherto 
enjoyed but few of the creature comforts which are available to 
those who live in the highly-developed industrial countries. It is 
urged upon us that every undeveloped country must be put on an 
industrial basis as rapidly as possible. Yet such industrialisation not 
only presents a monumental task of education and training, it also 
requires a vast amount of capital. How vast can be appreciated by 
considering that some two-thirds of all mankind live in the under- 
developed countries. This huge demand for capital must, if the 
wishes of the philanthropic are to be met, be supplied by that 
remaining third of the world which has lost and squandered a large 
part of its savings in the course of two cataclysmic world wars. 
All the savings in the world are insufficient to satisfy each one of 
these idealistic pipe dreams, and only out of savings can economic 
development be financed. Yet unfortunately the aid-granting 
fervour has caused the banks to invoke their power to create money 
in order to remedy the shortage of capital. The need to reconstruct 
and make up for the losses of the war yean already demands an 
enormous amount of capital in the countries directly concerned. 
If one adds the needs of the developing countries to this amount, 


6 1 

one can easily see how important it is to bring capital needs into a 
certain relationship with new capital savings. Instead we are per- 
mitting ourselves to be carried on the crest of a wave which, 
because of the continuous devaluation of money, will certainly 
reach a point at which all development comes to an end. The 
resulting economic crisis would then compel us to begin again at the 



The years between 1920 and 1924, which even today are still known 
as the ‘period of inflation, are amongst the most difficult ever 
experienced by the German economy in peacetime. For all who still 
remember it, the fall in the value of money at this time meant 
reductions in property values, impoverishment of the upper and 
lower-middle classes, corruption in the government and the civil 
service, undernourishment, and the rise of doubtful personalities 
to sudden riches. This and much else is summed up by the word 
inflation. By the end of the war the Mark was worth about half 
as much as before its outbreak. A gold Mark (the standard by which 
the paper currency is measured) was worth two paper Marks. But 
by November 1923 a gold Mark was worth a billion paper Marks. 
Written out in full the figure is: 1,000,000,000,000. Within five 
years the German Reichsmark had sunk to one fivehundred- 
millionth of its value. To make such comparisons is to play with 
numbers. But what faced the individual bread-winner trying 
to maintain his family was no game, but direst need. 

Other languages have no equivalent for the word ‘Wahrung\ 
They call it ‘monnaie’ or ‘currency’ and thus ‘coin’ or ‘circulation 
medium’. The German word expresses most succinctly the real 
significance of the means of payment: it must ‘last’ (wahren — to 
last) and it must have stability, i.e. it must maintain its value. 

Before state-guaranteed paper money was invented, commodities 
which had value in their own right were used for money. The Latin 
word ‘pecunia’ is derived from *pecus’ a head of cattle, and dates 
from the time when the herds were the means of exchange which 




enabled one to purchase a wife and other goods. Most widely 
used as mediums of exchange were the metals gold, silver and copper. 
Gold was the most favoured of them and it has retained its rank as 
the best means of payment for thousands of years. 

Before the war, bank-notes owed their value principally to the 
fact that the state or the note-issuing bank undertook on demand 
to exchange the paper money tokens issued by them for gold. 
Today this is no longer possible. All the gold in the world would not 
suffice to effect the exchange of paper money for gold coin. Even 
in former times it would not have sufficed had all owners of bank- 
notes presented them for exchange into gold. But such a possibility 
never had to be allowed for. The bank note was accepted, because 
everyone had confidence in the state’s ability to pay. Internationally 
the gold standard was maintained by the fact that the Bank of 
England was prepared not only to buy gold at a fixed price, but 
also to sell it at this fixed price at any time. Even if later on other 
central banks for their part undertook similar obligations, it was 
still the world-wide trust in the Bank of England which gave paper 
money the same status as gold coin. 

This trust was so great and so much a matter of course that no- 
one ever gave a moment’s thought to the fact that the gold standard, 
which the whole world adopted in the course of the last quarter 
of the 19th century, was not a currency standard which carried any 
international obligations. Each country, even if its central bank 
was under obligation to exchange paper for gold, had only a 
national currency i.e. one restricted by law to its own country. 
The obligation to exchange paper for gold was not of decisive 
importance for the internal circulation of a currency. At home the 
crucial fact was that money had been given the character of ‘legal 
tender’. This signifies that by law all financial obligations contracted 
within one’s own country, be they to private individuals or to 
public corporations can be settled by means of the paper notes and 
coins of the realm which constitute the country’s currency. 

This legal provision proved completely fatal to the German 
currency after the First World War. Due to the continuous and 
progressive devaluation of the Mark every long-term debt meant 



heavy losses for the creditor. Anyone who in 1918 raised a loan 
over five years and used it to buy land or other durable goods, or 
anyone who had long-standing debts, was able on die due date in 
1923 to repay the nominal amount borrowed with a Mark worth 
only a fraction of the value of the goods bought with the borrowed 
money. The borrower obtained durable goods for his money, 
but the lender only received worthless paper Marks. Anyone with 
debts grew rich. 

Other countries did not escape inflation. But Germany was 
hardest hit, and in Germany in particular it affected the mass of the 
people. As in all business and money matters, the educated classes 
notice and grasp the implications of clianges in money value 
more rapidly than the uninformed man in the street. Anyone who 
recognised the inflation in time could safeguard himself against 
paper money losses by buying, as rapidly as possible, any commo- 
dities which, like houses, landed property, manufactured goods and 
raw materials, would keep their value in contrast to paper money. 
The flight into material goods enabled not only the well-to-do but 
also, and more particularly, all the sharks, to preserve and increase 
their fortunes. Anyone in a position to incur debts grew rich. 

The way these people pushed to grow rich by exploiting the 
ignorant majority led to a moral poisoning of every aspect of busi- 
ness life. All saving ceased. Anyone unable to find any durable 
material goods to buy spent all his money as rapidly as possible 
on all kinds of things giving immediate pleasure. The less money was 
worth, the quicker the pace of its devaluation. Great unrest and 
mounting embitter ment afflicted the working classes, professions, 
the civil service, the office- workers and those living on fixed incomes, 
who often could not pay for the bare essentials. 

Perhaps it will be asked why the workers accepted such devalued 
money. The answer is simple: because modem man can neither 
buy nor sell without money. In a natural or barter economy there 
is no need for money. The modem commercial and market 
economy with its highly-developed division of labour cannot 
effect the exchange of goods and services without a universally valid 
means of exchange and payment. It is not possible to pay for a tram 



journey with a loaf of bread, or for a loaf of bread with a tram 
journey. Man needs money and cannot exist without it. The 
diabolic magic of money is here clearly visible. It has helped 
mankind to make immense strides in economic development, 
and has at the same time enslaved him. Regression to a moneyless 
condition, or the modem method of exchange by means of money - 
any kind of money, but still money - these are the alternatives. 
Money, plays the role of the sorcerer's apprentice - created to serve 
a master who cannot now rid himself of his indispensible sprite. It 
is the master now. 

Throughout history there have been periods of inflation. Only 
rarely can they be ascribed to circumstances which are beyond 
human cognition and control. Professor Gaettens, in his book 
‘Inflation 5 , ascribes the collapse of the currency at the time of the 
Roman emperors to the fall in the price of copper, which caused 
a fall in the value of copper money. In the majority of cases, however, 
inflation comes about through mistaken financial policy, or even 
more frequently because the costs of wars and armaments exceeded 
income from taxes. 

In the second half of 1923 numerous employers began to pay their 
workers in kind. This was an emergency measure full of loopholes 
and offering only a partial solution. Undertakings requiring 
working capital or capital for investment, issued bonds repayable 
not in money but in anthracite. Kilowatt hours of electricity, 
potash, cement and similar articles. This kind of bond entitled 
the creditor to a definite quantity of coal, electricity, etc. It kept 
its value in .terms of a particular commodity, even if the value of 
money fell. The need to stabilise the currency grew more desperate 
with each passing day. The Reichsbank upon which this responsi- 
bility fell could not make up its mind to take action. It held the 
view that it was useless to attempt to. stabilise the currency so long 
as the Ruhr was occupied and the war debts remained unfixed. 

Privy Councillor von Grimm, a member of the directorate of the 
Reichsbank, explored this question in his speech to mark the fiftieth 
anniversary of the bank’s foundation on 2 January, 1926. To an 



ever growing extent the Reich had to resort to the Reichsbank if it ] 

was to prolong its existence, and because the point at issue was the 
survival of the Reich, the Reichsbank did not regard itself justified 
in refusing even after the passing in 1922 of the law which gave it 
formal autonomy/ The legislation of 1922, which was intended to 
free the Reichsbank from the claims of the state, came to grief 
at the decisive moment because the Reich could not find any 
way of holding its head above the water other than by the inflation- 
ary expedient of printing banknotes. 

In 1922-23 a whole series of plans aimed at restoring stable 
money were published, and publicly discussed. 1 participated 
only to the extent of suggesting chat a means of payment based on j 

gold should be found, a form of money which would be usable only 
abroad, and which would provide the populace with an index of 
how far the value of the paper Mark had fallen since yesterday. 

I regarded the deception of the public over the value of the paper 
Mark to be particularly unjust socially. 

One amongst the many plans suggested aroused special interest: 
it was promoted by a strong political group in the Reichstag 
consisting mainly of members with agrarian connections. Karl 
Helfferich formerly Liberal, now Conservative, wanted to institute 
a currency bank which would be administered by Germany's 
agricultural interests. In principle Helfferich availed himself of an 
idea which was already being applied in industry: loans were no 
longer drawn up in money but, as we have seen, in quantities of goods. 

The capital of the bank would consist of a five per cent first charge 
mortgage, half of which would be raised on agricultural and the • 

other half 011 industrial and commercial property. The mortgage 
would take the form of annuity bonds and would constitute the 
security for the paper money to be issued. This would be payable | 

according to the price of rye, and could be exchanged for a certain 
quantity of the cereal. The Reichsbank would remain in existence ; 

side-by-side with this proposed new currency bank; provision 
would be made for the new money to be exchanged into Reichs- | 

marks at a later date. j 

There was rightly much opposition to this plan in industrial, f 



trading and banking circles, while agricultural interests promised 
themselves an increase in political influence. After much discussion 
the government promulgated a new plan for a Rentenmark which 
differed from Helfferich’s concept principally in the following 

1. Independence in managing the Rentenbank was restricted by a 
formal framework and the granting of credit was transferred to the 
Reichsbank which was empowered by the Rentenbank to borrow a 
corresponding amount in Renten banknotes. 

2. The banknotes issued were based not on the fluctuating value and 
price of rye, but on gold. 

3. Rentenmark money was not made legal tender nor was a fixed rate 
of exchange between the new money and the Reichsmark established. 

This removed the worst deficiencies of the Helfferich project. The 
government’s rejection of other suggestions which were directed 
at the immediate restoration of the gold standard, and its decision 
in favour of the modified Helfferich project, must be ascribed to 
internal party-political motives. From a point of view of currency 
theory, the Rentenmark was a misconception. Not even Helfferich 
could close his ears to the objections which were advanced. He had 
to admit that the new money was no use in effecting international 
payments, and that it could only constitute an emergency bridge 
to the gold standard. He also admitted that in addition to the 
Rentenmark a foreign bill or gold Mark would, as I had suggested, 
be needed in order to facilitate the transmission of foreign payments. 

Helfferich’s change of front brought him generally into line with 
my own thoughts on the matter. Soon after, when I became Com- 
missioner for Currency and then President of the Reichsbank, I made 
every endeavour to take the Rentenmark out of circulation as quickly 
as possible and finally to abolish it altogether, at the same time bring- 
ing the Reichsmark back to full validity. To this end the Reichsbank 
gave the Rentenmark parity with the new Reichsmark. The 
Reichsbank exchanged every Rentenmark al pari into Reichsmark, 
or, in other words the Reichsbank guaranteed the Rentenmark 
exactly as it did the Reichsmark. 

If the public believed that all the miseries of inflation could be 



cured merely by inventing the Rentenmark, it was greatly mistaken. 
The invention of the Rentenmark did not stabilise the Mark; the 
battle for stabilisation continued for a year, passing through many a 
difficult phase. 

One of the first problems arose over the abolition of emergency 
money. The origin of this emergency money resembles a satire 
which precedes the real tragedy of the inflation. It arose simply out 
of the fact that it was a technical impossibility to provide the multi- 
coloured paper notes in quantities sufficient to effect all payment 
transactions. While before the war the presses of the Reichsbank 
had printed all banknotes, in 1923 133 additional printing firms 
with 1783 machines were needed to supply die demand. More than 
thirty paper manufacturers worked at full capacity solely to provide 
paper for the Reichsbank notes. Yet even with this immense output 
the Reichsbank was unable to deliver enough banknotes to stacisfy 
the demand. It often had to ask the provinces, municipalities and 
individual large concerns to print and put into circulation their own 
emergency money. In such cases it gave an assurance that it would 
redeem these emergency notes exactly as if they were its own bank- 
notes. By the end of 1922 the amount of emergency money in circu- 
lation already amounted to one tenth of the Reichsbank notes, 
and by the end of 1923 there was as much emergency money as 
Reichsbank money. 

The result of issuing these emergency notes was that the Reichs- 
bank lost control over the circulation of money and also stopped 
presiding over the credit system. If everyone could print his own 
money, equivalent in value to Reichsbank notes, then the Reichs- 
bank had to relinquish its position as central bank in control of all 
currency and credit. 

The first step towards the stabilisation of the Mark was therefore 
a decree issued by the Reichsbank on 17 November, 1923, whereby 
it would not accept any emergency money after 22 November. 
Holders of these notes were given four days in which to redeem the 
emergency money lying in the safe deposits of the Reichsbank. 

The result was immense consternation amongst those who 
profited from the system of emergency money. I was assailed from 



all sides by requests and pleas to withdraw the decree. Had I given 
in to this pressure the work of stabilisation winch had just begun 
would have been in vain from the start. When I as currency 
commissioner had to attend the discussions of diose emitting 
emergency money, I did not allow myself to be deflected from my 
purpose. The emergency money vanished. If my firmness did not 
make me popular with the industrialists and the municipalities, 
this was a cross I had to bear. Hugo Stinnes went so far as to inform 
the Reich Government that the businessmen of the Rhineland 
would decline to have any further dealings with me. It took well 
over a year before my opponents recognised that my measures were 
justified - by then the stabilisation of the Mark had succeeded. 

There were several other occasions in the course of my activities 
in the field of currency policy on which business circles, particularly 
big business, were dissatisfied with or divided about my measures. 
Although my policies were always directed towards the furthering 
of the economy, at times they must have been uncomfortable and 
troublesome in their effects. This lost me much sympathy, and has 
not been forgotten even today. I have always appealed to the sense 
of responsibility of the captains of industry. Responsibility is the 
fundamental condition for the preservation of private property and 
of all private enterprise. 

There was a second obstacle to the stabilisation of the Mark. 
On 20 November, 1923 the Reichsbank decided to maintain a 
rate of exchange of 4.2 billion Marks to the Dollar. This rate was 
chosen essentially for accounting reasons. The peace-time exchange 
rate had been 4.2 Marks to the Dollar. Thus it was now only 
necessary to remove the noughts from the 4.2 billion in order to 
achieve a simple conversion to the old gold Mark basis. By and large 
any other rate of exchange could have been chosen. The main 
thing was to fix the exchange rate. 

The speculators, however, did not believe that the Reichsbank 
would be able to hold this rate of exchange rate for any length of 
time, and bought dollar after dollar on time bargains at a much 
higher rate of exchange. Towards the end of November the Dollar 
reached an exchange rate of 12 million Marks on the free market 



of the Cologne bourse. This speculation was not only hostile to the 
country's economic interests, it was also stupid. In previous years 
such speculation had been carried on either with loans which the 
Reichsbank granted lavishly, or with emergency money which one 
printed oneself, and then exchanged for Reichsmarks. 

Now, however, three tilings had happened. The emergency 
money had lost its value. It was no longer possible to exchange it for 
Reichsmarks. The loans formerly easily obtainable from the Reichs- 
bank were no longer granted, and the Rentenmark could not be 
used abroad. For amongst the stipulations governing the issue of the 
Rentenmark, there was one which forbade the surrender of Renten- 
marks to foreigners. For these reasons the speculators were unable 
to pay for the Dollars they had bought when payment became due. 
They were forced to sell the Dollars back, and the Reichsbank was 
not prepared to pay more than the official rate of 4.2 billion Marks 
to the Dollar. The speculators made considerable losses. A bare 
ten days later the rate of exchange of 4.2 billion fixed by the 
Reichsbank had re-established itself. That measure too was hardly 
designed to make me more popular. This was the first time that the 
Reichsbank brought hoarded foreign exchange back into its coffers. 
Four months later it was given another chance to achieve this 

This first success had also a favourable effect on the internal 
payments situation. Whereas at first small traders had preferred to 
deal in Rentenmarks they soon grew accustomed to Reichsmarks. 
Already by December, trade accepted Rentenmarks and Reichs- 
marks on equal terms. Yet all this still did not add up to the ending 
of inflation. Everything had to be done to prevent any new in- 
flation in the future. The fact that the Reich government was no 
longer allowed to raise credits with the central bank contributed 
to this and the success of this restriction was in large part due to 
the Reich Finance Minister, Luther, who showed himself just as 
resolute in the face of pressure as the Reichsbank. 

Yet the greatest impediment to a final stabilisation of the Mark 
was the growth of industrial credit. Industry and trade were bled 
financially dry by the inflation. To set the economy in motion 


7 1 

again required a great deal of help from outside, which the Reichs- 
bank was asked to an ever greater degree to supply. It was difficult 
to deny these justified claims for credit. The lost war and the 
subsequent years of inflation had seriously retarded the progress of 
the . German economy. Economic reconstruction demanded 
considerable new resources. But all available capital had been spent 
on war costs and reparations. Thus there was no alternative to 
making use of credit. And the only authority which could grant 
such credit was the Reichsbank. But the Reichsbank could not 
print banknotes to its heart’s content and put them into circulation 
without engendering a new inflation. 

A certain willingness on the part of the Reichsbank to meet 
those, who clamoured for credit legitimately halfway had the 
unfortunate result that the Reichsmark fell below par on the foreign 
money markets. At the end of 1923 the Reichsbank and the Renten- 
bank had outstanding credits of some 609 millions, four weeks later 
this had increased to 1153 millions and by the end of March the 
amount stood at over 2,000 millions. This rapid increase in the 
circulation of money in an economy which was still heavily in 
deficit not only pushed up the level of commodity prices, but also 
affected the exchange rates. The Reichsbank’s reserves of foreign 
exchange fell once again. Back in December 1923 the Reichsbank 
had been able to meet between 15 and 20 per cent of industry’s 
foreign exchange requirements but by the beginning of March the 
proportion was down to one per cent. Fears that the Reichsbank 
would be unable to maintain the Dollar exchange rate were once 
again on the increase. The spectre of a new inflation re-emerged. 
Once more speculators began to hoard foreign exchange. 

The Reichsbank was compelled to take energetic measures. The 
still-valid instructions, whereby foreign exchange purchase orders 
were to be executed by the banks only if full cover in German 
currency was provided by the purchaser, had not been heeded 
by various banking firms. The Reichsbank, responsible as it ms for 
the currency, could not countenance such disobedience. First 
reminders and exhortations were tried. When these proved of no 
avail, the Reichsbank resorted to drastic measures to force the banks 



to acknowledge their reliance upon the Reichsbank. Recalcitrant 
banks were excluded from using its clearing facilities, the Reichsbank 
refused to discount their bills until and unless they complied 
with the instructions. The fact that one of the four big banks was 
amongst those so reprimanded caused a great stir. 

In the meantime the economy's need for credit increased to such 
an extent that whatever decision the Reichsbank reached would 
have serious disadvantages. It had to face the question whether 
to grant an increasing amount of credit to the economy - which 
would have meant a fall in the value of the Mark and a new inflation 
- or whether to maintain the stability of the Mark. The Reichsbank 
plumped for the stability of the Mark. On 5 April, 1924, an edict 
was issued whereby as from 7 April no new credit of any kind would 
be granted, and all new discounting of bills of exchange would be 
suspended: from now on discounting would only take place to the 
extent to which repayment of credits would cause money to flow 
back into the Reichsbank’s cash reserves. 

Understandably enough this intervention, which contradicted 
all the traditions of central banking, caused a great outcry. The 
bank stood firm against this storm. It was vindicated by success. 
The difficult period of credit restriction lasted no more than two 
months. All speculators, who had once again hoarded Dollars, 
exchanged their holdings of foreign exchange for Reichsmarks 
and thus enabled them to be used to aid the economy. The bank's 
action saved not only the currency, but also confidence in the 
currency. This confidence was not based on tedious expositions of 
proof or exhortations, but was supported by the weight of action. 
The wholesale price index, which in April had still stood at 124, 
was down by June to 115. If on 30 May the bank could meet only 
one per cent of foreign exchange requirements, by 3 June it was in a 
position to satisfy the entire demand for dollars. For the first time 
since the previous decade the German foreign exchange market 
functioned smoothly and properly. Only now, as was confirmed by 
public opinion, was there positive proof of die success of the 
stabilisation of the German currency. The Reichsbank’s gold and 
foreign exchange reserves, which had at the beginning of April, 



1924, amounted to 600 million Marks, more than doubled by 
7 August. 

At that time, in a speech delivered before a German industrial 
association, I justified our untraditional action in these words: 
‘I believe that the Reichsbank finds itself in the position of Odysseus, 
who had to steer a course between Scylla and Charybdis. Charybdis 
is the maelstrom of a new currency inflation, and Scylla is the monster 
which drags men from the ship of the economy, and devours them 
through the economic crisis which shows itself in the collapse of 
industry. I believe that the Reichsbank has no alternative but to make 
the same choice as Odysseus, that is to avoid the inflation maelstrom 
of Charybdis, and to steer close to Scylla, who may drag a few 
beings out of the ship and devour them, but allows the rest to pass 
through unharmed.’ 

Strangely enough, a few years later a literary and political dispute 
began about the question of who should take the credit for stabilising 
the Mark. Since the large majority of laymen rarely understands 
the connections between financial matters, this dispute centred on 
the Rentenmark. Thus the name Schacht became associated with 
the ‘invention’ of the Rentenmark. The German Democratic 
Party, which I had helped to found, plastered an election poster 
with the legend ‘Who was it thought up the Rentenmark? Who 
other than Schacht, a democrat’. ( l Wer hat die Rentenmark erdacht? 
Das war der Demokrat, Herr Schacht .’) 

This was a completely incorrect description of the process which 
effected the stabilisation. Nonetheless, it was a description which was 
easily grasped by the public at large. In actual fact it has never been 
established who really coined the word ‘Rentenmark’. It was 
probably dropped casually in the course of parliamentary debate, 
and then perpetuated by habit. Indeed from the very first I myself 
always stated emphatically that I regarded the Rentenmark as a 
completely inadequate solution to the problems besetting currency 
policy. It was justified only by the party-political conditions then 

A contemporary authority A. G. Gustav Brecht, formerly a 
Councillor in the Ministry, and later for many years governor of the 



Rheinischen Braunkohlen AG* said in his memoirs: ‘The vehement 
dispute between the “fathers of the Rentenmark” and Dr Schacht 
winch later arose over who fathered and deserved the credit for the 
ultimate rescue of the currency, generally overlooked the essential 
point. This was clear almost from the first to my friends in the 
Reich Ministry of Economic Affairs as it was to me. The Renten- 
mark was psychologically effective, but lacked a solid foundation. It 
was not the Rentenmark, but the subsequent rigid credit restrictions, 
that made the new Reichsmark currency “stable”/ 



A central currency bank cannot allow competition. If the Renten- 
bank had been made independent of the Reichsbank, Germany 
would not only have had two currencies, but also two kinds of 
credit policy. Each of the two banks would have granted credit 
after its own lights, and each kind of banknote would have had its 
own rate of exchange. The crucial criterion for the approval of tire 
Rentcnmark was that it should not be accorded the status of ‘legal 
tender which would have made its acceptance for payment legally 
enforceable. The notes issued by the Reichsbank did, however, 
retain their status as legal tender. Only the fact that the Reichsbank 
at once announced tliae it would accept the Rentenmark at any time 
at the same value as its own new Reichsmark, avoided a differentia- 
tion between the two currencies. 

Modem paper money, the banknote, is backed by its creator, the 
State. It is true that John Law, the inventor of paper money, 
recommended a kind of cover based on landed property, but Law 
too saw that the principal security for paper money lay in confidence 
in the government, which has legal control over all kinds of things 
which would provide security. The failure which put an end to 
Law’s measures was not so much caused by a paper money inflation, 
as by a collapse of speculative activity in the shares of the overseas 
enterprises he liad founded. The value of his paper money was not 
based on these public companies, but only on their relationship with 
the state. Law rightly recognised that money, if it does not consist 
of tangible metal, is purely an internal affair of. the national state. 
Tliis remains true today. 




For this reason there is no such thing as international currency. 
It is unlikely that it will ever come into being. International money 
would have to be granted the status of legal tender in all countries 
in which it circulates. In all these countries it would have to be 
possible to settle every state and private obligation in this currency. 
Any institution controlling this currency irrespective of whether 
it is a bank or a government department would dominate the world - 
an unthinkable situation. Currency is the most nationalistic factor 
in political life. Every central bank responsible for issuing it is 
dependent on the government of the country by whose lam it was 
instituted, and which makes its notes legal tender in the country’s 
home territory. 

The granting of credit is unthinkable without a central bank. 
No central bank can be allowed to act against the government of 
the country. The government is over the central bank, and influences 
its policies. It is thus also in a position to inflate the currency by taking 
up too much credit with the central bank. No international central 
bank could countenance such a situation. It cannot permit one of the 
governments with which it is associated to misuse its facilities 
unless every other government is in agreement. This however is a 
condition which cannot be reconciled with the fight of all against 
all in time of economic difficulty. No state will surrender so much 
of its sovereignty that its partners or competitors are given the 
power to prescribe its economic and financial policies. 

Standing over and above central bank and government, both of 
which are led and administered by changing personalities, there is a 
higher, impersonal, and substantially necessary law: the stability, 
the constancy of value, of money. This higher law has in the past 
granted the central banks an autonomous, independent position. 
Governments change, and can pursue good or bad currency and 
credit policies according to whether or not it is to the advantage of 
the party in power. We have seen that during the period of absolute 
rule even the princes forged their own coinage. Towards the end 
of the Seven Years’ War Frederick the Great also resorted to this 
deception, so that it was said of the silver money coined by his 



court factor Ephraim, that it had 'the soul of a rogue, from outside 
it looked like Frederick, but Ephraim peered out from within*. 

On the other hand, in a democracy the idea that a central bank 
might pursue policies hostile to the government is politically 
untenable. The only answer is that when an unbridgeable conflict 
between the. currency conceptions of government and central bank 
arises, that conflict must be decided by the authority which makes 
the laws of the land. The populace must be informed of such a 
far-reaching disagreement. When in March, 1961, the German, 
cabinet secretly decided upon the revaluation of the Deutschmark, 
contrary to the views of the central bank, it was a fundamental 
error. Had Parliament discussed the intended revaluation - which 
incidentally is almost universally condemned today - it would 
certainly not have taken place. The same thing would have hap- 
pened had the central bank had the courage to promulgate its views 
at the time. When the opinions of the central bank on essential 
matters diverge from those of the government, the bank has 
a right and duty to put its opinions to parliament in full view of 
the public. Nonetheless, the example of political influence exerted 
over the central bank in this case of the German revaluation makes 
the national character of every currency especially clear. 

Even if common currency is regarded and desired as the crowning 
achievement of the European Common Market, it would be wrong 
to leave the relationship between the government and the central 
bank out of account. Frequent reierence is made to the German 
customs union of 1834, and to the institution of the German currency 
in 1873. But it is often forgotten how many sovereign rights in the 
economic and financial fields the individual German principalities 
had to surrender. For decades the Reich fought with the princi- 
palities forming the Union over their matricular contributions 
(yearly • subventions by the provinces to the Reich). And even 
today the financial relations between the state and die provinces 
remain a delicate point in German home affairs. Here too the magic 
of money is manifest: it is no link between nations - it is rather the 
opposite. The effects of this magic are sometimes good, sometimes 
bad. But greater co-operation is desirable. 



The closer the economic ties between various countries, the easier 
will it become to reach agreement on currency policies. Whether 
these will ultimately lead to a unitary currency will always depend 
on the extent to which the participants are prepared to surrender 
their sovereignty. Here in fact is the Common Market's chief 

All currency projects which emerged during the inflationary 
period foundered in the last resort because the Reichsbank was unable 
to grant anyone else the right to issue notes which would have the 
status of legal tender. Any currency bank, with the right to issue 
legal tender, existing side by side with or acting against the Reichs- 
bank, would have been a dangerous foreign body. This situation 
threatened to arise when in the autumn of 1923 the battle against 
the French occupation of the Ruhr began to peter out. 

The financial stringency which the French occupation brought 
to the Rhenish- Westphalian economy, gave rise to the idea that an 
independent Rhine-W estpha I ian currency bank might be founded 
to cater for the credit needs of the province's economy. It is no 
longer possible to establish whether this idea originated with the 
French or the Germans. In any case the French occupation authorities 
took up the idea with diabolic glee. It offered a means of separating 
the economy of Rhine-Westphalia from the rest of the Reich in a 
legal, seemingly-friendly, way, while at the same time seriously 
setting back the underground clamour for an independent state on 
the Rhine. Many leading Ruhr industrialists saw in the foundation 
of such a bank the only way to keep their concerns in operation, 
and succumbed to the temptations offered by the French. They did 
not, or did not wish to, recognise the immense political dangers 
which were inherent in such a move, since the majority of the 
capital and thus a controlling interest in the direction of such a bank 
would be in French hands. The Rhenish interests were at that time 
reproached for a lack of patriotism almost amounting to treason. 
Here, as in the prologue to Wallenstein, one can see men forced 
to act by the pressures of the moment and we must ascribe a greater 
part of the blame to their unlucky stars. 

The Rhenish separatist movement originated . amongst very 



dubious elements, and was soon associated with all kinds of shady 
riff-raff. The movement became a serious threat as soon as the 
issues of money and credit were joined. The government in Berlin 
could give neither money nor credit, yet the Rhine-Westphalian 
industry needed both if it was to continue giving employment to its 
workers. The leaders of industry therefore felt compelled to keep 
faith with the French. They referred their predicament to the Berlin 
government, which was itself under a great strain because it could not 
see any way of offering help from its own resources. The possibility 
of founding a Rhenish currency bank was discussed with great 
bitterness, and it seemed quite unavoidable. 

Fortunately, the French intentions were not realised. By good 
luck I was given the chance to prevent them from being brought 
into effect. Shortly after my appointment as President of the 
Reichsbank at the end of December 1923 and prior to taking up my 
office, I went to London to discuss the German currency situation 
with Montagu Norman, Governor of the Bank of England, who 
had invited me to visit him. From everything I had heard and read 
about Norman I formed the impression of a man who not only 
knew how strong was the pull which money could exert on political 
developments, but who also had the will to shape his currency 
policies in such a way that they served the best interests of a peaceful 
world economy. I anticipated that I would come face to face with an 
equanimous man with whom a sensible collaboration would be 
possible. I was therefore very glad when the German diplomat 
Dufour-Feronce, with whom I was on friendly terms, wrote to me 
from London to tell me what had occurred when he had announced 
my visit. He had said to Norman, ‘I hope you will like him’, 
to which Norman had replied T want to like him'. 

On New Year’s day, 1924, very early on in my visit to London, 
the conversation turned to the problem of the Rhenish currency 
bank. Norman was fully informed about the French plans and 
intentions. He had received a letter addressed to him in his capacity 
of Governor of the Bank of England by Finaly, Chairman of the 
Banque de Paris et des Pays Bas. In it Finaly, on behalf of a group of 
French banks, asked Norman whether he could put him in touch 



with a number of English banks which would be prepared to partici- 
pate with the French in the formation of the Rhenish currency 

Norman’s assent would have meant the realisation of the project. 
Yet now Norman sat opposite the president of the German Reichs- 
bank, his professional colleague, to whom he ascribed responsibilities 
similar to his own. His intelligence and fairness, which cannot 
be esteemed too highly, enabled me to explain the devastating 
consequences which would ensue for the German economy, and thus 
also for the peaceful reconstruction of the world, if the German 
currency were to be split into fragments. When 1 concluded with 
the remark that unfortunately the German government did not have 
the strength to prevent the French plan, Norman replied quite 
calmly ‘In questions of currency I go by the views of the Reidisbank 
not those of the government’. Next morning Norman showed me 
his reply to Finaly, in which he declined his request. It contained 
nothing more than the sentence that he did not know of any English 
bank which would be interested in the proposed project. This was 
sufficient to take the steam out of the idea. The spectre of Rhenish 
separatism was finally exorcised. The magic of money, which it 
seemed would lead us forcibly into evil ways, had instead diverted 
us onto the road to good. 

Naturally the French occupation authorities would have made the 
notes of the Rhenish currency bank legal tender. This would have 
meant that this legal tender would have been valid within a strictly- 
defined territory. Were this to have happened the first step towards 
the territorial separation of the Rhineland from the rest of Germany 
would have been taken, and what is happening today in the Russian- 
occupied zone of Germany would then have happened in the West. 
The currency of the zone is also legal tender in the German territory 
behind the wall. 

While it was still uncertain how soon the stabilisation of the 
Mark would succeed, I was able to realise my original idea of a 
currency bank working on a gold basis and existing together 
with the Reichsbank, by founding the Deutsche Golddiskontbank 



(German Gold Discount Bank), DEGO for short. It was to operate 
with foreign currency, had a capital of 200 million Marks in foreign 
currency, and was granted a credit of bills to the value of 300 million 
Marks on the London market. Norman had let it be known that 
the Bank of England would be prepared to discount these bills. 
Half of the capital was paid in by the Reichsbank out of a credit 
granted to it by the Bank of England. The other half was raised 
by German banks. In order to obtain the support of the Bank of 
England, I went so far as to make provision in the statutes of DEGO 
for notes to be issued in Pounds Sterling. Such notes would, how- 
ever, not have been granted die status of legal tender. Nor were they 
ever issued. The direction of DEGO was entrusted to the Reichs- 
bank, and thus it really existed not side by side with, but under, the 
control of the Reichsbank. 

The successful stabilisation of the Mark enabled the Reichsbank 
to repay the 100 million credit obtained from the Bank of England 
within a year. DEGO remained in existence. After 1945 the govern- 
ment quite unnecessarily and quite incomprehensibly dissolved the 
bank. It could have been of great value in helping to combat our 
new, third, inflation. DEGO was no product of National Socialism. 
It was founded in 1924, and already in the period before 1933 it 
played a very valuable role in supporting the Reichsbank, because 
it was in a position to carry out a number of transactions which were 
in the interests of the central bank, but which the latter could not 
carry out itself, because they were not foreseen in its statutes. Its 
main task lay in the facilitation of export by accepting its bills at a 
lower rate of discount than the Reichsbank would have been able to. 
Also instead of restricting itself to bonds and bills payable within 
three months, it financed medium and long-term credits. It secured 
foreign credits which it used to support the Reichsbank during the 
bank crisis of 1931. During this crisis it also performed a whole 
series of other duties without which the crisis could not have been 
ended so smoothly. Thus, the gold discount bank could have 
performed valuable services in the recent imported inflation. It 
would also have made a worthwhile contribution to development 



Germany was not the only country to which Montagu Norman 
gave financial and banking assistance. In the 'twenties the Bank of 
England helped many foreign central banks. While the French were 
so short-sighted that they had eyes for none but their own interests, 
Norman recognised the need to revitalise the whole of world trade. 
This was certainly also in the interest of England. The Sterling 
currency was the world’s main trading currency and served all 
countries participating in trade. It was Norman’s aim to make 
London the centre of the international payments system, exactly as it 
had been before the First World War with benefit to the entire 
world. Not until after the Second World War did London lose this 

To the best of my knowledge no substantial reason for the liquida- 
tion of the gold discount bank has ever been made public. I am 
rather inclined to see the reason in the revulsion against everything 
connected with the Hitler era. Yet those concerned had obviously 
forgotten that the DEGO was in existence long before Hitler. 
During his era it served German trading policy well. Like the 
Reichsbank itself, it always and at all times met its foreign obligations. 

However psychologically understandable it is that all things tainted 
by Hitler should be rejected, we should patently not permit ourselves 
to be traduced into ignoring the positive experiences gleaned in this 
period. We should certainly not wish to forget the horrors and 
crimes of the Nazis, nor should we forgive those who took part in 
them, but it is foolish to neglect the positive results and achievements 
which the German people brought forth even under Hitler’s 
tyranny. This is true above all in the fields of social and economic 
policies. The placing of the interests of Germany as a whole before 
those of the provinces or municipalities, the abolition or at least 
reduction of class distinctions not only in monetary but also in 
humanitarian matters, full employment, the optimum use of leisure 
time, the social services, maternal and family welfare, the battle 
against waste, all these remain worthy of our consideration and 
deserve further development even if in some cases we are dealing 
only with a cumbersome attempt to learn by trial and error. The 
fact that they were instigated under National Socialist auspices does 



not detract from their note-worthiness. This applies particularly to the 
economic policies prosecuted in the ’thirties. Adolf Weber said of 
them ‘all in all the economic policy of this period was thoroughly 
constructive. Nay, as an economist who has made a thorough 
study of the world’s economic problems I find it incumbent upon 
me to state: in all the long years between the two world wars no 
one in any other part of the world carried out so constructive an 
economic policy as we did between 1933 and 1935’. Weber made 
this observation not in the Hitler era, but in 1948. 

However pleasing it was that the Dawes plan shifted the reparations 
problem from the political to the economic sphere, it soon emerged 
that the solution of the payments problem was not made any the 
easier as a result. Quite correctly, the Dawes plan concluded that 
Germany could meet its obligation to render reparation payments 
only from the proceeds of a surplus in its balance of trade. Germany 
would have to save or earn sufficient quantities of foreign exchange 
and make them available for repayments under the Dawes plan. 
However, Germany could save foreign exchange only by restricting 
its imports of foreign goods. But other countries did not wish to 
forego the German market as a customer for their goods. Germany 
could earn and set aside foreign exchange only by increasing 
its exports of goods. But checkmate once more, foreign coun- 
tries were not prepared to buy more than a normal and moderate 
quantity of goods from Germany. 

The world economic crisis of 1929 to 1932 reduced German 
exports to a very low level. The countries which had up to then 
been Germany’s customers tried to reduce their imports, because 
they too had been hit very hard. This was especially the case with 
those countries which had granted credit and loans to Germany. 
Everywhere customs’ duties were raised, import restrictions applied, 
and quotas on German goods imposed. Some countries where 
Germany’s interest and loan redemption payments had fallen 
into arrears even resorted to seizing the proceeds earned from 
imported German goods, and using them to effect payments on the 
German loans. In the annual review published in December, 1931, 



the Frankfurter Zeitung published a succinct account of the measures 
taken by foreign countries: 

In the second half of 1931 fantastically high tariff walls were erected 
by those countries which took four-fifths, of German exports. This 
trend began in August 1931 in France which established the first 
import quotas at this time. In September 1931 Poland raised its 
industrial customs duties by up to one hundred per cent, and Italy 
imposed an all round fifteen percent surcharge on customs’ duties. 
In October 1931 France established further import quotas and in 
addition raised its tariffs. Six other countries joined this trend to restrict 
imports, and five others planned to restrict imports as from December 
1931. Even Holland, a former bastion of free trade, introduced a 
twenty five per cent increase in duties and established import quotas. 
The new National government of England imposed a further fifty 
per cent ad valorem duty mainly on German imported specialities, 
and thereby added yet a further impediment to the obstacles to imports 
already presented by die devaluation of the Pound. 

To overcome the obstacles presented by these foreign measures 
was a matter of life and death for Germany. Two possibilities 
presented themselves. The first originated in the spirit with which 
the National Socialist party was imbued, and consisted in the attempt 
to become as far as is conceivably possible completely independent 
of foreign raw materials. Autarchy was the ideal. Germany was to 
live on German raw materials, foreign trade was to be restricted 
to the absolutely indispensable. 

Now it is certainly true that in the case of certain raw materials 
a substitute for imported goods can be produced at home. The only 
consideration to be weighed up here is whether the substitute 
would not be considerably dearer than the import. A higher price 
means a higher expenditure of labour and a reduction in the 
standard of living. German chemistry and German agriculture have 
made astounding advances in their field in recent decades; they have 
created many new raw materials and found quite new uses for 
existing raw materials. It was thus absolutely right to facilitate 
attempts to achieve a greater degree of autarchy, so long as this did not 
engender other unpleasant consequences. Yet unfortunately an 



excessive emphasis on the idea of autarchy results in weakening the 
friendly ties between the nations, and increases isolation and 

Exaggerated autarchy is the greatest obstacle to a world-wide 
culture. It is only culture which can bring people closer to one 
another, and world trade is the most powerful carrier of culture. 
For this reason I was unable to support those who advocated the 
autarchistic seclusion of a hermitage as a solution to Germany’s 
problems. On the other hand, I had to break the short-sighted and 
dangerous stranglehold which foreign countries were exerting on 
Germany. A way had to be found of conducting a trading policy 
which would ensure that Germany’s requirements of raw materials 
and foodstuffs were met. In September 1934 I introduced a new 
foreign trade programme which made use of offset accounts, and 
book entry credits. 

Apart from small transactions very few payments are made in cash. 
Balances are transferred from bank to bank. This is made possible 
either by having a cash deposit with the bank, or by the bank 
granting credit. This payments technique provides the banks with 
their greatest opportunity to increase the volume of credit granted 
to the economy, or to restrict it. For internal economic intercourse 
this means that the banking system can increase the circulation of 
the means of payment without the direct intervention of the 
central bank. Not of course by means of banknotes, but by means 
of the book entry. This necessitates constant vigilance and surveil- 
lance 011 the part of the central bank, which must always be fully 
aware of the amount of credit granted by the banks to industry, 
allowing for it in its calculations. So long as book entry credits 
are issued in a reasonable ratio to the goods on offer, all is well. 
There is however the danger that utilising the book entry credit for 
investments, to pay for services rendered, or even for bare-faced 
speculation on the stock or commodity exchanges, will lead to abuse. 

My plan was to some extent a reversion to the primitive barter 
economy, only the technique was modern. The equivalent value 
of imported goods was credited to the foreign supplier in a German 
banking account, and vice versa foreign buyers of German goods 



could make payment by means of these accounts. No movement 
of money in Marks or foreign currency took place. AU was done 
through credits and debits in a bank account. Thus no foreign 
exchange problem came into being. So long as our creditors, 
despite the indications to the contrary given by the Dawes and 
Young plans, continued to think of reparations and loans solely in 
terms of transferring money, rejecting transfers of goods, the new 
plan was the logical as well as the natural answer. It was also a 
practical demonstration which had the pleasing effect of gradually 
giving our creditors a better insight into our situation. For if these 
creditors thought they had found the remedy in controlling German 
exports, in clearing agreements, or even in impounding export 
proceeds to effect interest payments, the reaction in their own coun- 
try must have come as an unpleasant shock to them. Those in- 
terested in the exchange of goods came into conflict with those 
interested solely in money. There was soon a battle royal between 
the exporters who sold goods to Germany, and the creditors who 
wanted their interest. Both parties demanded to be given preference, 
but the decision always went in favour of foreign trade. 

I concluded special agreements with a number of states which were 
our principal sources of raw materials and foodstuffs. Anyone who 
wished to sell raw materials to Germany had to purchase German 
industrial products. Germany could pay for goods from abroad 
only by means of home-produced goods, and was thus able -to 
trade only with countries prepared to participate in this bilateral 
programme. There were many such countries. The whole of 
South America, and the Balkans were glad to avail themselves of the 
idea, it favoured their raw materials production. 

By the spring of 1938 there were no less than 25 such offset 
account agreements with foreign countries, so that more than one 
half of Germany’s foreign trade was conducted by means of this 

This trade agreement system in which two countries - Germany 
and one foreign country - were always involved, has entered econo- 
mic history under the name of ‘bilateral’ trading policy. It created 



much ill-feeling in countries which were not part of the system. 
These were precisely those countries who were Germany’s main 
competitors in world markets, and who had hitherto attempted 
to effect repayment of their loans by imposing special charges on their 
imports from Germany. The countries participating in bilateral 
trade were not amongst those which had granted Germany loans. 
They were primary producers or predominantly agrarian, and had 
hitherto scarcely been touched by industrialisation. They utilised 
the bilateral trading system to accelerate their own industrial 
development by means of machines and factory installations 
imported from Germany. 

The bilateral trading system kept the German balance of payments 
under control for many years, but it was not a satisfactory solution, 
nor was it a permanent one. It is true that it enabled Germany 
to preserve its industry and to feed its populace, but the system could 
not provide a surplus of foreign exchange. No more was ever 
imported than was exported. Import and export balanced out 
exactly in monetary terms. Thus this system achieved the very 
opposite of what I, in agreement with the foreign creditors, had 
deemed to be necessary. 

The bilateral trading system was not ideal. Nor was it a spontan- 
eous invention. It was merely a reaction to and a means of over- 
coming the discrimination against German products. Germany’s 
creditors demanded payment in foreign exchange, but refused to 
let Germany earn foreign exchange through sales of her goods. 
What else was left to Germany but to take its trade to places which 
were prepared to accept German produce ? Already at the time when 
I introduced the bilateral trading system I made it known that I 
regarded it as a most inadequate and unpleasant system, and ex- 
pressed the hope that it would soon be replaced by an all-round, 
free, multilateral trading policy. In fact the system did have 
some considerable influence on the trading policies of Germany’s 
competitors. The measures taken against German exports were 
gradually lifted. 

So far as monetary policy is concerned, the crucial aspect of 
bilateral trade is the fact that it takes place without any transfer 



of money. An inevitable concomitant was the necessity to grant 
credit. The foreign supplier was not always able to obtain immediate 
delivery of the German product which he wanted. Often he had 
to wait until such a product was ready for delivery, and thus had 
to give credit for this period. The same happened from the other 
side in the case of deliveries of agricultural produce which was tied 
to the seasons. In such a case the German manufacturer supplied 
his goods in advance, and gave the foreigner credit until such time 
as the harvest would enable him to deliver the equivalent. 

Seldom did the magic of money become evident to such a high 
degree as in the case of this bilateral trading system. Here credit 
was not granted voluntarily for any private business reasons, it 
followed inexorably from the necessity to dispose of or acquire 
goods. Although the already-supplied or yet-to-be-supplied goods 
constituted the security for the credit, repayment was bound 
to the general volume of production, and thus the period over which 
the loan would be required was uncertain. Tliis is also one reason 
why this system could not be extended in time and extent as freely 
as one would have wished. It was dependant on the mutual possibi- 
lities of delivering the chosen goods. In the course of the years 
Germany in particular found itself in arrears, because it could no 
longer supply sufficient industrial products. Hitler's rearmament 
cook up too much of the productive capacity of German industry. 

This bilateral trading system was something new and was useful 
in the circumstances then prevailing in Germany. It was, however, 
by no means a system of universal validity. Of course the circum- 
stances which led me to adopt the system are not unique. It would 
have been possible to apply the system at an earlier date when 
Germany and Austria were planning a customs union. In the spring 
of 1931 the German Foreign Minister, Curtius, thought he could 
provide the Br lining government with a success in foreign policy 
by establishing a customs union between Austria and Germany. 
He had Austria’s agreement in his pocket. But no-one had reckoned 
with France's political opposition. The project foundered and 
brought about Curtius’s resignation. 



This would not have happened had Curtius tried an offset customs 
account system like the bilateral trading process. The German 
importer of Austrian goods would have put the customs duty 
payable to the credit of a customs account. Conversely, the Austrian 
importer would have credited the German supplier. The customs 
duty credits would have been handed over to the state, and at the 
end of each year the balance in favour of one or the other of the two 
countries would have been settled. The words ‘customs union’ would 
never have been used, nor would the whole system have been 
introduced overnight. Instead it would have been extended from a 
few goods to a larger number, and finally to all commodities. 

Bilateral trade is by no means the ideal instrument for world 
commerce. It does not supply foreign exchange for the purchase 
of such goods as cannot be obtained from the bilateral partner. Nor 
does it permit trade to be extended beyond the ability of one of the 
two partners to supply goods. Its possibilities of development are 
therefore limited. Multilateral trade is and will remain the goal to be 
aimed at. Nevertheless, the system has found wide acceptance else- 
where, and its applicability has been proved. A few days after the 
Court of Niimberg cleared me, Sir Stafford Cripps, Socialist 
Chancellor of the Exchequer said at the opening of the British 
Commonwealth Economic Conference ‘Schacht will take no part 
in any of the discussions arising at this conference. But Schacht’s 
spirit will be present with us all. The question arises whether world 
trade, and particularly that of Great Britain, can be increased to the 
necessary extent without putting some of Schacht’s ideas into practice*. 

For my part I would not say that the bilateral trading system, 
ranks among those of my measures which are worth copying. 
However it can be avoided only if the international payments 
system functions properly, and if neither inflation nor war debts 
disrupt the international credit and money systems. From time 
immemorial war and inflation have done just that and often brought 
countries and people to their knees. 

The Dawes plan was able to function for some seven years, from 
1925 to 1931, because in that period Germany raised so many 



loans abroad that it was able not only to satisfy the needs of its 
own economy, but also to transfer the annuities due under the 
Dawes plan. That, however, by no means squared with the spirit 
of the Dawes plan and this fact was soon brought home to foreign 
countries as well. 

In the autumn of 1929 the sensational crash on the New York 
stock exchange heralded the greatest world economic crisis ever 
seen. American willingness to grant loans to Germany came to an 
end. The total volume of world trade rapidly shrank to a third of its 
former level. At the same time it became apparent that Germany 
would be unable to fulfil its obligations under the Dawes plan. 
Doubt about whether the Dawes plan could function permanently 
led to the convocation of a second committee of experts under the 
chairmanship of the American industrialist Owen D. Young. This 
committee worked out a new plan, known as the Young plan. 
It retained the basic idea of the Dawes plan, differing from it 
essentially in that it reduced the figures fixed by the Dawes plan by a 
little. The Young plan did not inspire confidence for it could not 
dispel the general feeling that the problem of reparations had not 
been satisfactorily solved. The loan instigated by the Young 
Committee (the Young loan) to bolster up German industry and the 
German currency, was not taken up in its entirety, remaining 
to a large extent on the hands of the issuing banks. 

This provided proof, if proof was needed, that excessive unilateral 
monetary demands made by one modern industrial state against 
another cannot be met. Germany’s debt payments came to a stop, 
and even the one-year moratorium which was granted in June, 1931 
at the instance of the American President, Hoover, could not prevent 
the total collapse of the German economy in July, 1931. A year 
later, all claims to further reparations were finally buried officially 
at the Geneva conference. 

After the Second World War no one tried to repeat what had been 
attempted by the Dawes and Young plans. This time, too, the 
victors took what they could by way of land and material goods: this 
time, too, they confiscated German foreign assets, German machi- 
nery, apparatus and stores, German patents, German industrial pro- 



cesses, and even persuaded many German scientists and technicians to 
put their knowledge at their disposal. But they did not demand pay- 
ments of money to countries abroad. On the contrary, this time 
the allies were wise enough to help Germany to get back on her feet 
through Marshall Aid. Nor was there any lack of success. While 
by 1931 world trade had sunk to a minimum, by 1965 it had risen 
to a level never previously attained. 

The fools who after 1918 demanded war damages of 420 milliards 
from Germany should have learnt the lessons of their own history. 
When Bismarck came to determine the reparations to be paid by 
France after she bad lost the war of 1871, he sought and took the 
advice of an experienced banker, James Bleicbroeder. The amount 
was limited to 4 milliard Marks. This was the sum which in Blcich- 
roeder’s view could be paid without bringing the economy of 
France into insuperable difficulties, and without endangering French 
currency. France was a rich country, and justly had an excellent 
credit standing in the world. The damage to its industries occasioned 
by the war was inconsiderable, and the costs of the war had not 
been excessive. The war damages laid down were easily paid by 
France out of her own resources aided by her international credit 
standing. Her currency was never in danger. 

In 1918 at the end of the First World War everything looked 
different. Where the war of 1S7T had been fought with soldiers, 
in the 19 14-18 war the emphasis to an ever greater extent was 
transferred from men to machines. Lives unhappily are cheap, 
but machines are expensive. The Franco-Prussian war of 1 870-1 
lasted seven months, the First World War took more than fifty 
months. The destruction wreaked on Germany’s industry was 
tremendous, the financial condition of the state, and thus its credit- 
standing, was approaching zero. 

The victors’ claim that the losers should make good the enormous 
war expenditure was directed at a country completely incapable of 
paying. The total cost of the First World War was estimated at the 
time to amount to some 850 milliard gold Marks. Germany’s share 
of this loss was estimated at 150 milliards. The allies thus aimed at 
the restitution of 700 milliards, which it was intended to squeeze out 



of Germany. In actual fact the first demand by the French Finance 
Minister, Klotz, was for 420 milliards. That it was senseless to accept 
such sums in German currency, and thus in banknotes issued by the 
Reichsbank, was self-evident. German Marks had purchasing 
power only in Germany, what was needed were Francs, Pounds 
Sterling, Dollars, which could be spent in one’s own country. 
Germany had already spent its gold reserves in the course of the 
war. Nor did it have any Dollars, Francs or Pounds. The victors 
therefore reverted to the methods of compensation current in ancient 
history. All moveable goods which could be of any use were carried 
away. The ancients took their booty mainly in the form of slave 
labour abducted from the conquered lands. With our present day 
social system that was no longer possible. The unemployed of the 
victor states would certainly have protested against such a method. 
But material goods were of use. Germany could supply coal, 
potash, ships, waggons and locomotives, chemicals, steel and other 
industrial products. Of course, this too would soon rouse opposition 
in the victor states, whose industries wanted to make and sell these 
things themselves. In November, 1925, the renowned Swedish 
economist, Professor Cassel, asserted that the prospects for further 
reparation payments were not good, because to effect them German 
exports would have to be raised to double the volume of the 
previous year. It was impossible to see who would accept these ex- 
ports. Professor Keynes was even more pessimistic in his public 
utterances. It was very much to the credit of the Dawes plan that it 
transferred the reparations problem from the sphere of the political 
power game to that of economic possibility. Today it is of great 
interest to recall its basic ideas. 

After die Second World War the division of Germany into a 
Western and a Soviet-dominated Eastern zone placed a great 
burden on financial development. All financial obligations which 
were imposed on defeated Germany had to be borne by West 
Germany. Though it may be true that the material exploitation of 
the Eastern zone went even further than it did in the West, financial 
obligations were laid upon the West alone. The world should 
remember the fundamental conclusion of the Dawes plan on this 



theme, which demanded the ‘re-establishment of Germany’s external 
and internal credit through the re-establishment of the fiscal and 
economic unity of the German Reich’ as a basic pre-condition for a 
solution of the problem of reparations. 

To transfer large sums of money from one country to another 
without providing any kind of equivalent value has proved to be 
impossible. In the barter economy, and in the restricted medieval 
money and payment system when coin still had the value of its own 
substance, this problem never arose. After 1918, however, it was 
proved publicly to be insoluble. No currency bank in the world 
has gold and foreign exchange reserves large enough to enable such 
a vast war debt to be settled. Such debts can be paid only by means 
of goods or services. 

A currency can be used only in places where it is legal tender. 
Naturally in the normal course of international trade and commerce 
currencies are carried hither and thither, but in the last resort they 
can be used only in the country in which they originated. No one 
will purchase a foreign currency unless he is obliged to pay debts 
in a foreign country, or wishes to buy its products. Once again we 
see currency to be the most nationalistic of all economic factors. 


Before the First World War the general tone of the German economy 
was so good that no-one gave a thought to crisis, let alone to war. I 
tnyself can give proof of this from my personal experience. Through 
some Austro-Hungarianfriendslsucceededinjune, 1914, in bringing 
some new issue business to my bank. The town of Budapest raised 
a loan of 40 million Marks, which was taken over by the Bank of 
Dresden, and placed on the German market. If there had been the 
slightest fear of war two months before the outbreak of hostilities 
such a loan issue would never have taken place. It was not until the 
assassination in Sarajewo at the end of July, 1914, that the possibility 
of war was taken seriously. 

The war of 1914 provided telling proof of the fact that state- 
guaranteed paper money, unlike gold and silver coins, does not 
represent any substantial value. Marshal Trivulzio said that three 
things are necessary to make war: money, money, and yet again 
money. Ludwig XII asked him what armaments and stores would 
be required to conquer Milan, and Trivulzio was quite right to 
assume that he would be able to purchase die necessary arms and 
provisions with the money then in circulation. With our paper 
money this is not possible. It does not consist of gold and silver. 

The war of 1914 isolated Germany from the greater part of die 
world market. Even at points where Germany bordered on neutral 
neighbours, the purchasing power of the Mark was limited to the 
amount which these countries were able to employ to purchase 
German goods. The Mark had become unusable on enemy markets. 
It had lost its purchasing power. The public was faced with the 




fact that wars are fought not with money, but with material goods, 
with soldiers and their equipment, with guns, rifles, vehicles, 
aircraft, ships, etc. These material goods were made, not of paper 
money, but of iron and non-ferrous metals, of textiles and many 
other raw materials. Foodstuffs had to be purveyed, and this could 
hot be done by means of paper money, but only by goods which 
were wanted as an equivalent. 

Raw materials and foodstuffs were not available in sufficient 
quantities. The principal material goods which, apart from manu- 
factured exports, could be sent to the neutral foreign countries as 
payment were gold coins and gold. The available funds were, 
however, quite insufficient to conduct a war which was to last four 
years. Thus in addition to the war effort, an export of goods had 
to be kept alive so that the proceeds might be used to pay for the 
required materials. The shortage of raw materials and foodstuffs 
led to existing stocks being allocated to consumers in strictly limited 
quantities. The state-managed economic system made its first 
appearance in modem economic history. Socialisation by public 
bodies entered into the free capitalistic market economy. War 
inclines to socialism. 

But even if trade with foreign countries was a question of exchang- 
ing material goods, money did not abrogate its role in internal Ger- 
man trade. Here it remained a commercial instrument, a means of 
exchange and unit of account. In a war the state is the largest 
employer and buyer of goods. The state had to find money to pay 
the soldiers and the industrial workers, as well as for all the products 
required to fight the war. The normal state budget is not sufficient 
for such out-of-the-ordinary and one-sided needs. The state was thus 
compelled to resort to making inroads into the income and capital 
of its citizens. The mere multiplication of banknotes could result 
in nothing less than a general rise in the price of goods. For the 
quantity of goods docs not increase merely because the quantity 
of notes in circulation increases. For this reason the savings of the 
population had to be mobilised. Such savings could be taken from 
the populace either by taxation, or by state loans to which the 
citizens would be exhorted to subscribe. 



In 1914 the German government financed the war almost entirely 
by the second alternative. Through state loans it transformed the 
savings and movables of its citizens into claims on the state. 
Whether or not these claims would be honoured, depended on the 
outcome of the war. This method of financing was mistaken. A 
state which goes to war must come to terms with the fact that war 
is a matter of life and death, and that therefore every citizen must 
participate down to his last savings and last possessions. Taxes 
imposed upon the citizen in war-time bring him face to face with 
the true reality. The war loans given to him in the form of paper 
in return for his services, only serve to deceive him about the serious- 
ness of the position. In 1916 the German state secretary Helfferich 
comforted those who subscribed to war loans with the promise that 
the financial dead weight of the war costs would be debited to the 
enemy. In 1941 Churchill was more honest when he promised 
the British people nothing but blood, sweat and tears. 

In Germany’s first enthusiasm there were voluntary acts which 
faced up fully to the seriousness of the situation. The Reichsbank 
not only delivered up its own gold, but also gathered in gold 
jewellery and the gold in the peoples’ pockets by exchanging gold 
pieces and jewellery for iron commemorative coins. Yet the slogan 
‘I gave gold for iron’ did not make any considerable contribution 
to the war effort. In relation to the immense military expenditure, 
the gold possessed by the people amounted only to a tiny fraction. 
The main slogan of war finance therefore remained the constantly 
repeated exhortation ‘Buy War Loan’. By the war’s end hundreds 
of milliards of war loan had been taken up by the German public, 
milliards which defeated Germany would be unable to redeem. 

Germany’s opponents, particularly England, availed themselves 
of the first alternative. There the war of 1914 was financed princi- 
pally by taxes, directed in the first instance to those circles and con- 
cerns which profited from supplying materials of war. The taxation 
policy pursued by the English wartime government proved itself 
more socially just than the German policy of loans which lost their 
value after the war, and thus proved a great disappointment to those 
who had willingly made sacrifices by subscribing to them. In 



Germany the numerous war profiteers were left to enjoy their gains. 
Apart from the profits earned from war industries, high profits 
were to be made from trade. Often the import of quite ordinary 
foodstuffs from neutral countries meant considerable gain for those 
concerned both inside and outside Germany. At one time during the 
war Albert Baffin, the managing director of the Hamburg American 
Line, entered the foyer of the Hotel D’Angleterre in Copenhagen, 
and saw the multitude of dealers gesticulating in frenzied bargaining. 
Turning to his companions he said ‘Altogether I’d say these people 
between them deserve 30 years in jail’. 

The First World War had two crucial lessons to teach future 
warmongers. Firstly that it is necessary to possess or have ready 
access to a quantity of raw materials and foodstuffs sufficient to 
cover all needs throughout die foreseeable or possible duration of the 
war. Secondly that those waging the war should be prepared if 
necessary to devote the whole of the national income to the war 
effort, and that die necessary sacrifices should be spread justly and 
evenly. When Hitler started the Second World War he had 
completely failed to leam the first lesson. It did not require the 
second sight of a prophet to forecast the unfortunate outcome of a 
war fought against opponents so rich in raw materials and foodstuffs 
as England and France. When Japan ventured to make war on 
America I commented ‘A country which produces nine million 
tons of steel a year can never win a war against a country which 
has a steel output of 90 million tons per year*. 

In 1934, in the course of a lecture which I had been invited 
to give before the officers of the war academy by their commanding 
officer. General Thomas, I said that weapons of war could not be 
made out of paper tokens. I also said ‘The possibility of making 
and winning war is closely dependent on the economic strength and 
equipment of a nation. A modern war is unthinkable without a 
most highly-developed industrial technology and without the great- 
est efforts both in production and in distribution’. I referred to the 
fact that failure in a prolonged war was inevitable from the very 
beginning unless the continued supply of foreign raw materials could 
be guaranteed. .1 had agreed with General Thomas that these 



connections between war and the economy ought to be made clear 
to the officers in the Academy of War so that all magniloquent 
military fantasies could be discouraged. 

Hitler used neither taxation nor the raising of loans to finance 
his war. Instead he chose to print banknotes. He paid for all home- 
produced goods needed to wage war with banknotes which could 
never have held their original value. The consequence was another 
inflation. Legal goods quotas, price control, and restrictions on trade 
and commerce prevented this inflation from becoming immediately 
apparent. Its recognisable effects were postponed to the end of the 
war, but then they became apparent with correspondingly greater 

My lecture to the Academy of War was thus of little avail. 
Most officers never learnt to understand the essence of money. 
Nor did Hider have the least inkling of an understanding for 
money and the monetary system. This can be seen in these two 
stories. One evening I met Admiral Raeder at a theatre. ‘You look 
so happy, Admiral, what is it?’ 

‘Well, Schacht, I have good reason to be cheerful, the Fiihrcr has 
just granted me 60 milliard marks for the development of the navy, 

6 milliards per year for the next ten years.’ 

‘That really is something out of the ordinary, Raeder. May I make 
so bold as to remind you that in 1932 under the chancellorship of 
B riming the entire income of the Reich amounted to no more than 

7 milliards. You, however, will get almost as much for the navy 
alone. Where do you think all this money is coming from?’ 

‘Well, of course, that is something which my successors will have 
to worry about.’ 

I was more than somewhat perplexed by this reply. I had not 
anticipated such abysmal lack of knowledge, and such frivolity in 
the high command of one of the three arms of the Wehrmacht. 
This same lack of responsibility was shown by the Minister for 
War, Blomberg. When in the summer of 1936 Hider informed me 
that he would announce a new party programme during the coming 
party conference, I feared the worst. I went to see Blomberg, 
who, I believed, still had some influence on Hitler, and explained 



our economic problems to him. All that Blomberg had to say 
was ‘Mr Schacht, I can quite see that you are right, but I am firmly 
convinced that the Fiihrer will find a way out of all our difficulties’. 

It was also in the course of the First World War that I was drawn 
into the problem of war finance. In October 1914 I was asked 
whether I would be prepared to take on some banking tasks of an 
administrative nature in occupied Belgium. From then I was active 
in the German banking section in Belgium under one of the directors 
of the Reichsbank, Privy Councillor von Lumm. Unfortunately, 

I had not learnt the soldier’s first commandment, which was that 
one should at no time and in no place ever draw attention to one- 
self. I drew attention to myself through a number of unusual ideas 
which brought me nothing but trouble, and resulted in my being 
sent back home in July, 1915. 

One of the occupation problems was how to persuade the *■ 
Belgians to pay for the occupation costs in their own currency, to 
enable the troops to purchase the goods which they needed. The simple 
solution of requisitioning the required goods against paper certificates 
aroused much ill will and odium, both among the populace and with 
the occupying forces. The chief of the banking section wished 
to solve this problem by creating a new Belgian currency. I con- 
sidered this to be unnecessary, since it was quite feasible to work with 
the existing Belgian currency, but I did not have the authority to 
prevent von Lumm from giving effect to his intentions. However, 

I found an alternative solution to the problem of requisitioning. I 
undertook to organise the payment of the occupation costs, and had 
discussions to this end with the Belgian Societe Generale de Belgique. 

I succeeded in convincing the Belgian banks of the advantages cash 
payments would have over arbitrary requisitioning against paper 
certificates. Since the Belgian government had emigrated to London, 
and the Belgian state as such could not therefore be consulted, I 
suggested the nine Belgian provinces take the place of the country 
and jointly raise a loan for the same amount as the occupation costs 
- a loan to which the Belgian public would be invited to subscribe. 
After many discussions, amongst which those with the German 



military command were no less tricky than those with the Belgian 
governors of die provinces, my proposals were implemented. A 
loan of over 480 million Francs was agreed, to cover the first year of 
war. So far as I know the Belgian banks never offered this loan to 
the public, but retained it in their portfolios. After my departure 
from Belgium the German occupation authorities never succeeded 
in concluding another such loan agreement. I found satisfaction 
in the fact that one of the big Belgian banks which had participated, 
the Caisse de Reports et Depots, thanked me on my departure 
for protecting die Belgian economy. 

My work in Belgium also gave rise to a curious coincidence. 
I was on friendly terms with von der Goltz, the German Governor- 
General, who was known not only in Germany but also inter- 
nationally as Goltz Pasha, because he had for years been in charge of 
organising the Turkish army. His desire to be in the thick of the 
fighting soon led him away from Belgium and back to Turkey, 
where he distinguished himself with his successes against the English. 
In the following year he contracted typhus in Baghdad and who 
should have the unpleasant duty of embalming his body, so that it 
could be transported back home, but my elder brother, who was 
then serving as a staff doctor in the Turkish army. Sometimes the 
wheel of life comes full circle in a most mysterious way. - 

In the case against me before the Niimberg military court I was 
accused by the prosecuting authorities of financing a war of aggres- 
sion, namely the Second World War. As is well known I was 
acquitted. Yet the theme of German war finance has always been 
of interest to me. Students of contemporary history have un- 
fortunately not paid much attention to this question, but recently 
I came across an interesting investigation by a young historian, 
Gerhard Meinck, published under the tide Hitler und die deuisehe 
Aufrtistung (Hitler and German Rearmament). Meinck proves that 
Hitler did not concern himself with financial preparations for a war 
until very late in the day. At the time in question (1935-1937) he 
made no attempt to influence the preparations for the defence of the 
country. It is true that Hitler conducted his economic autarchy 
"with oratorical swank, it is also true that he did so with complete 



disregard of the practical possibilities. Meinck quotes from Hitler’s 
speech in the autumn of 1936, which announced the four-year plan: 
‘Sometimes, these days, attempts are made to make it appear that 
Germany went to war in 1914 with carefully prepared stocks of 
raw materials. That is a lie/ This was in reply to an assessment 
which I had reached not long previously, showing that the German 
raw material stocks in 1914 were valued at seven to eight milliard 
Marks as against a bare milliard in 1936. Meinck thus demonstrates 
that Hitler was completely in the dark about the necessary degree 
of economic preparations for a war. ‘Guns, planes and tanks alone 
are not enough/ he says. 

The prosecution at Niimberg concentrated on the question 
whether the rearmament I had helped to finance was preparation 
for a war of aggression, or whether it was only a case of armaments 
to be used in defence. The actual level of armaments expenditure 
must have a decisive influence on the answer to this question. The 
statements of tire witnesses Field-Marshal Milch, Admiral of the 
Fleet Doenitz, and General Jodi showed that Hitler did not have 
the slightest idea what was necessary from the financial and economic 
point of view to wage a modem war. The head of the war ministry, 
Field-Marshal Keitel, when called to the witness stand, declared under 
oath that the total expenditure of the Reich on armaments during the 
financial year 1935-36 amounted to five milliard Marks, while in the 
following two years the amounts were seven and nine milliards 
respectively. Such small sums were quite insufficient to prepare for a 
world war. 

Tilings were no different where the stockpiling of raw materials 
is concerned. Until the middle of 1936 Hitler did not concern himself 
in any way with the economic preconditions for waging a war. 
But he was repeatedly told that I, as Minister of Economic Affairs, 
emphasized the need to maintain foreign trade at a high level. In 
my deliberations with the government and business circles I always 
harked back to the fact that it was senseless to replace raw materials 
which could be imported cheaply with substitute materials expen- 
sively produced at home. At one time Goering exhorted a large 
gathering of leading industrialists to produce more without asking 



if it would be profitable to do so. I replied a few weeks later 
before a public of a similar composition that to do so would be to 
make the German economy into a robber economy which fed 
upon itself. It is quite without rhyme or reason to sow one barrel 
of com if the harvest will amount to only three quarters of a barrel. 

Hitler’s dissatisfaction with my economic policies led to his big 
speech at the autumn party conference of 1936 in which he an- 
nounced the second four-year plan. In doing this he exposed to 
public view his utter ignorance of economic realities. In a dis- 
cussion between my ministry and other government departments 
held a few weeks previously, figures for foreign exchange and raw 
material reserves were presented, with the caution that in the spring 
of 1936 the German economy’s stocks of raw materials had shrunk 
to two months’ supply. To increase the production of fuel oil 
substitutes would be a very slow process, and anyway the require- 
ments of industry were too large in proportion to the present 
possibilities of production. Regarding the foreign exchange position, 

I remarked that a 25 per cent increase in exports would be necessary 
to pay for the level of imports which was desirable. There was 
no chance of such an increase taking place in the foreseeable future. 
In his Party speech Hitler vehemently opposed my attitude, as can be 
seen from the extracts from Meinck’s work. Yet this speech did not 
contain a single indication of how the stock of raw materials might 
be increased, it only made demands, accompanied by accusations 
and threats addressed at industry. 

In his book Germany s economic preparations for war published by 
the Harvard University Press in 1959, Burton H. Klein gave a 
pregnant exposition of the manner in which Germany financed the 
Second World War. From Klein’s expositions it is clear that Hitler’s . 
financial and economic preparations for war were quite inadequate, 
and that the real exertions began only after the outbreak of war. 
Klein takes the view that subsequently Hitler and his general staff 
would have preferred better economic preparations for war, and he 
summarises why this did not happen as follows: ‘The first, and 
probably most important, reason was that 2 more pronounced 
deficit budgetary policy would have shaken confidence in the 



currency, and led to a new inflation/ Klein closes this section of his 
book with the following sentence ‘Without this concern about 
inflation and without such an effective champion of conservative 
financial policies as Schacht, Germany would undoubtedly have 
rearmed to a greater degree*. 

Hitler’s diatribe against industrialists in his 1936 Party speech 
raises the question whether it is at all true that the banks and industry 
and none other than they are to blame for the financing of war. 
It is not they but politicians and military men who decide about 
war and peace, and thus also about the existence of the state in 
which these industries work. What one could expect from the 
former is shown from the quoted conversation with Blomberg 
and Raeder. Industrialists and bankers are citizens of the state like 
everyone else. Like every other citizen of the state they are respon- 
sible for the acts of the politicians they have elected to the parliament 
which legislates and governs. It is easy to understand why the awful 
fate to which Hitler led Germany should ever and again bring up 
the question who is to blame for the Hitler regime, but it also easy 
to see why this question can never be satisfactorily answered. 

To everyone’s consternation the Reichstag elections of September, 
1930 led to an increase in the number of National Socialist representa- 
tives from 12 to 128. This was due to the world economic crisis 
then in full swing. During my lecture tour of America in the autumn 
of 1930, I was constantly asked for my views on the consequences 
of this landslide. I always replied that one would have to reckon 
with a further growth in support for the National Socialist move- 
ment unless a more sensible reparations policy was adopted towards 
Germany. When I returned from the United States, I advised the 
Reich Chancellor, Briining, to invite the National Socialist party to 
participate in the government, in order to give them a share in social 
and economic responsibility. Afterwards it was said that the National 
Socialists were not prepared to take such responsibility. That is not 
correct. At this time Hitler was prepared to. In the Reichstag 
session of 23 February, 1932, Dr Goebbels, the party chairman, 
stated that Briining had made a serious error in not granting the 



National Socialists a share of governmental responsibility after the 
September, 1930 elections. After the elections of July, 1932, when 
40 per cent of all votes were for Hitler, the party was naturally no 
longer prepared to participate in a government whose leader 
belonged to a smaller party. 

In a democracy it is customary and natural to offer the leader of 
the strongest party the task of forming a government. It is well- 
known that General Schleicher as Reich Chancellor fought shy of 
installing a non-democratic government protected by the Reich 
army, and that the Social Democrats and the Communists could not 
make up their minds to form a coalition government which 
would have been able to offer effective opposition to Hitler. What 
is less well-known is the fact that the chairman of the Social Demo- 
cratic party, Weis, when asked his views in January, 1933, replied 
that he saw no alternative to trying to work with a cabinet chosen 
by Hitler. 

The relevant question remains why it had not proved possible 
from the very beginning to pursue economic, social and financial 
policies which would have prevented the National Socialists from 
increasing the number of their representatives from 12 to 246 within 
less than two years. Today men who thought that even under a 
National Socialist government it was their duty to do their best 
for the welfare of Germany have reproaches heaped upon them. 
But one should reserve one’s reproaches for those, and only for 
those, who did not know how to put into effect policies which would 
have made a Hitler impossible. In 1934 Victor Schiff, one of the 
leaders of the Social Democrats, wrote an article in a Socialist 
journal which admirably explains why the Social Democrats were 
unable to carry out an economic policy which would have saved 
the day: 

‘If there is any point at all on which there was not and could not 
be a difference of opinion between us, then it is that Hitler owes his 
rise and his ultimate triumph principally to the economic crisis, 
the despair of the unemployed proletariat, the academic youth 
deprived of their future, the middle-class businessmen and craftsmen 
threatened with bankruptcy, and the farmers brought to dire straits 



by the fell in agricultural prices. In this respect there can be no 
denying that we all failed. There is no doubt that we were right 
to blame capitalism for the crisis, but beyond that we were not in a 
position to offer the masses anything better than mere socialist cant/ 
It is well known that Briining’s deflationary policy did not offer a 
solution. It ended in financial bankruptcy, with six and a half 
million unemployed. 

In January, 1933, after Hitler had been entrusted with forming a 
government there still remained the possibility of testing and 
influencing the government’s sense of responsibility because it was 
answerable to parliament. Hitler had to reckon with this possibility. 
And it was with this reservation too that Weis declared a Hitler 
government as inevitable. It will always remain a mystery on what 
grounds the middle-class minority parties passed an enabling law 
which gave Hitler the power to change the constitution of the Reich 
exactly as he wished. The parliamentarians who perpetrated this 
act of political irresponsibility have never been brought to justice. 
A number of them reappeared in the first parliament of the Federal 
Republic, and others have risen to even higher political honours. 

In my Ludwigsburg denazification trial I experienced an amusing 
aftermath to the vote on the enabling law. The former Reich finance 
minister, Dietrich - a forthright and diligent man - who was called 
as witness, was asked why he had voted for the enabling law. His 
reply was ‘I was indeed against the law, but the majority of the 
German-Democratic faction to which l belonged had decided to vote 
for the law, and since the party members were bound by the majority 
decision, I had to vote with the majority*. The presiding judge asked, 
‘How large was the party, and how large the majority/ Came the 
reply ‘The fection consisted of five men, two were against and 
three were for the enabling law’. Theodor Heuss, later to become 
Federal President and Reinhold Maier, later President of Baden- 
Wurtemberg belonged to this majority. 

For the sake of historical truth such things must not be glossed 
over. Unfortunately the blurring of historical events sets in very 
quickly, and often in the best-informed circles. One of the reproaches 
most frequently voiced by the Social Democrats is that the MEFO 

10 6 


(Metal Research Company) system made Hitler’s war armaments 
possible. In the first session of the newly-elected Bundestag, Paul 
Lobe as honorary president referred in his opening speech to the 
last session of the Reichstag on 23 March, 1933 in which Hitler’s 
enabling law was passed. Quite rightly he praised the Social Demo- 
cratic party for being the only one among the parties to vote against 
the enabling law. 

But the session of 23 March was by no means the last session of the 
Reichstag. This took place on the 17 May, 1933. In this session 
Hitler made a speech in which he declared that the German govern- 
ment was prepared to disarm if all other powers also disarmed. But 
if all the other powers did not want to disarm, then Germany would 
regard it as its right to take the same military measures as the others. 
Only after one and a half years, during which time the other powers 
showed no willingness to come to terms on the question of arma- 
ments, did Hitler begin to rearm. The first MEFO bills were 
drawn in August, 1934. Hitler’s declaration in the Reichstag 
session of 17 May, 1933 was approved by all parties without ex- 
ception, including the Social Democratic party. The decision of 
this Reichstag was unanimous. Thus if the Reichsbank in operating 
the MEFO bill system also granted MEFO bills which were used 
for weapons of war, it did so by the unanimous resolve of the 

What struck me most during the time of my Niimberg trial 
was the complete absence of any one with the courage to testify 
in my favour. Not one of my friends living abroad under the 
banner of freedom had the courage to confirm of his own free will 
the stand I took against Hitler’s war policies. Not one of the many 
Jews to whom I gave protection, and whom I helped to save their 
assets, had the initiative to offer to stand witness for me in Niimberg. 
Nevertheless, I can name one gratifying exception. 

This letter did not contribute to my acquittal because the chief 
American prosecutor, Jackson, simply suppressed this witness’s 
deposition. Had Heath addressed himself to one of the American 
judges or to my lawyer things would have been different. According 
to American legal practice, the prosecutor was not obliged to submit 



the deposition. But this in no way excuses Jackson’s immoral be- 
haviour. What can one say in favour of a man who was a member of 
the highest American Court of Justice, and who, in full knowledge of 
the contents of this letter, still managed to recommend my being 
sent to the gallows? 

On 19 September, 1959, 1 received the following letter: 

The Foreign Service of 
the United States of 
His Excellency 
Dr Hjalmar Schacht. 

Dear Dr Schacht: 

It has been some 14 years since I last saw you. I am sorry that I was 
ignorant of the publication in 1948 of your book Abrechnutig mit 
Hitler , which only came to my attention a month or so ago. It is a 
fine and truthful statement. As the Niirnberg verdict stated: ‘If 
die policy advocated by Schacht had been put into practice Germany 
would not have been prepared for a general European war/ 

For many years 1 have thought to write you and tell you of an 
intervention I made in your behalf. I was Director of Political Affairs 
for the American Military Government during the time of the 
Nurnberg trials. My branch of the American Military Government 
had nothing to do with the conduct of the Niirnberg trials, but as 
they went on I got die impression that Jackson was seriously pushing 
the preposterous case against you. After consultation with Robert 
Murphy, now Under Secretary of State, and with the permission of 
General Clay, I went to Niirnberg to see Jackson. I told Jackson not 
only should you never have been brought before that tribunal but 
that you had consistently been working for the downfall of the Nazi 
regime. I told him that I had been in touch with you consistently 
during the first part of the war and Under Secretary of State Weils 
through me, and that you had passed on to me information adverse 
to the Nazi cause, impelled by your patriotism and your ambition 
for Germany to be a peaceful foundation element of European unity. 
I told Jackson that it was probably pride and the feeling that many 
Germans would be unable to understand the truly patriodc motives 
of your actions which kept you from immediately exculpating your- 
self at Numbers. I may say that Jackson did not receive my news 

American Embassy 
Jidda, Saudi Arabia 
September 19, 1959 



and endorsement with any pleasure and when his assistant, whose 
name I have forgotten, prepared an affidavit for my signature it was 
not in accordance with my testimony nor as favorable an endorsement 
as I had recommended. I had to insist on its being changed before I 
signed it. I am trying to obtain from the archives a copy of my 

I do not think my action was responsible for the verdict in your 
favor. I had little doubt you would be freed. Doubtless many others 
knew and admired your work communicated with Judge Jackson, 
but I am happy that I did intervene. 

I am in Germany for a few days and would greatly enjoy the chance 
of seeing you for a moment. 

With best wishes, I am most, 

Sincerely yours, 

Donald R. Heath 
American Ambassador to 
Saudi Arabia 

Oil a suitable occasion in the case against me, 1 remarked that 
I expected to receive from the Rcichsbank the pension which 
was due to me by agreement. The malicious cynic responded: 
‘Well, perhaps the cost of living won’t be very high in your case, 
doctor.’ I dismissed this macabre observation with a chuckle. 
Clever Mr Jackson did not expect me to be acquitted, but I was 
sure I would be. Jackson wanted my head, the judge let me go free. 

The lesson to be learnt from all this is that war is the greatest of 
all possible misfortunes. Any compromise is preferable to war. 
War is unavoidable only when the point at issue is the defence of 
a nation’s existence. 



Despite the completely inadequate reserves of raw materials and his 
insufficient financial means Hitler started the Second World War. 
The fact that for three years it took place outside Germany’s borders 
enabled him to make good Germany’s own economic deficiencies 
by exploiting the occupied countries. The result was that later on 
when the financial reckoning came, it hit Germany all the harder and 
a second inflation was unavoidable. Rationing and price-control 
staved it off for a little while longer, but after tbe war notliing could 
stop it from running riot. 

How far the purchasing power of the Mark had once again fallen 
as a result of this second inflation emerged only after the end of the 
war, and the renewed collapse of the German economy. Impoverish- 
ment and misery was far worse than after the First World War. A 
huge number of houses, offices and factories had been destroyed. A 
stream of io million refugees from the East clamoured for resettle- 
ment. The restrictions of the war years were made even more 
stringent: rations were even shorter. 

Nonetheless, the extent of the inflation could not be compared 
with that of 1923. Although the number of notes in circulation 
at the end of the war was never determined exactly, it is generally 
estimated at between 40 and 60 milliard Marks. The task which 
presented itself after ’the war was to ensure that this level was 
maintained and not exceeded. In other words, the inflation had to 
be kept in check, it could not be allowed to spread. It would 
certainly have been useful to reduce the high figures in which prices 
were quoted. To this end it would have sufficed if the notes in 




circulation had been over-printed or marked in some other suitable 
way, and then returned into circulation. In 1939 some 10 milliard 
notes were in circulation. If we take the number of notes in circula- 
tion in 1945 at around 50 milliards (the mean of the estimates 
between 40 and 60) then an egg which in 1939 had cost 20 Pfennigs 
would have cost a Mark in 1945 (all other factors affecting prices 
being equal). Thus, to avoid large numbers, make five old Marks 
equal to one new Mark. 

In the summer of 1945 I was for political reasons in American 
custody. One day a high-powered Buick arrived at the internment 
camp in Ludwigsburg, and a most elegant American lieutenant 
emerged from the car. He asked for Dr Schacht. I was driven to 
the camp at Oberursel, where a very friendly American colonel 
asked me to tell him what in my view should be done about the 
German currency. Since I did not have access to documents, I 
could only give him my very superficial opinion that I regarded a 
simple change in nominal value making three old Marks equal to 
one new as sufficient. The colonel replied that he would see to it 
that all the necessary documents were made available to me, so 
that I could make a report. I waited three days for these documents, 
but none arrived. Then an ordinary private in a broken-down old 
Jeep took me back to my camp. I never saw the elegant Buick again. 

But my short stay in Oberursel did nonetheless bring me some 
pleasure. A large number of so-called ‘prominents’ were confined 
to a house called Alaska. They were mostly old acquaintances, 
and included Admiral Horthy, the Hungarian regent, whom I later 
saw again in exile in Estoril. Some time later I also learnt the back- 
ground to my curious visit to Oberursel. The colonel who sum- 
moned me was a friend of the famous General Patton, and a 
Republican. He wanted to deal with questions of economic policy 
in collaboration with the Germans. However, this was contrary 
to the policies pursued by the Democrats, who took the line laid 
down by the ill-famed Morgenthau. They therefore prevented my 
continued collaboration in this matter. I never met Morgenthau, 
but I had a nodding acquaintance with his father, who was for a 
short time American ambassador in Constantinople. My London 


2 1 1 

publisher later told me that after the appearance of my memoirs 
in England, old Morgenthau’s son came to collect the first copy. 
I hope he learnt something from it. The second inflation, then, was 
a direct result of Hitler’s war. Until then, currency policy was well 
run, and the economy was properly under control. 

Hitler’s most urgent task after taking over the government in 1933 
was to get rid of unemployment. Six and a half million people 
had to be brought back to productive work. The problem consisted 
not only in the provision of the necessary financial backing, but also 
in finding productive work to employ people in the regions in 
which they lived. Public works — building roads, tunnels, canals 
and dykes — were an excellent source of employment. B ut when such 
works began to be carried out on a large scale it meant that large 
numbers of labourers had to be brought together, with all the atten- 
dant problems of the need to build hostels, estrangement from home 
surroundings, and many other social and cultural disadvantages. 
Jobs had to be found wliich were not tied to any one place, but 
which would bring orders to as many factories and workshops 
as possible all over the Reich. 

Three main methods were used. The first was an extensive 
programme of repairs devised by Reinhard, the state secretary 
of the Reich finance ministry. Loans were granted for repairs to 
houses, factories, machines. They were very welcome, since during 
the deflation years of the B riming era many plants and installations 
had suffered, because daily maintenance had been neglected. Much 
needed to be done in the private as well as in the public sector. One 
can imagine the joy and the eagerness of government administrative 
officials all over the country when suddenly they were at last given 
the money needed to carry out postponed, neglected, or abandoned 
tasks. The second method was the building of the autobahns, 
and already in the summer of 1933 work began with the building 
of the stretch connecting Frankfurt/Main with Darmstadt. As the 
number of employment opportunities grew perceptibly, the 
Reichsbank . began to grant direct loans for both these activities. 
A milliard was made available for the Reinhard programme, and 



600 million for the autobahn. Both amounts were later paid back 
into the Reichsbank. 

The third method was the defence programme. The building 
of barracks and the equipping of troops brought orders to concerns 
spread over the entire country. As the cost of this part of the 
programme to secure employment for everyone was so great and 
the repayment period so long, the method by which credit was 
granted directly to the Reich could not be used here. There was too 
great a danger that the Reichsbank, in granting direct credit, would 
lose control of currency policy. A way had to be found which would 
ensure that the Reichsbank was able to restrict and limit the amount 
of money in circulation. It took us in the Reichsbank a year and a 
half to find a system which was suitable, and would still enable us to 
pursue a responsible currency policy. The provision of money for 
defence did not therefore begin until the late summer of 1934. 

The system worked in the following way: a company with a 
paid-up capital of 011c million Marks was formed. A quarter of the 
capital was subscribed by each of the four firms Siemens, A. G. 
Gutehoffunungshiitte, Rheinstahl and Krupps. Suppliers who 
fulfilled state orders drew up bills of exchange for their goods, and 
these bills were accepted by the company. This company was given 
the registered title of MetallforschmigsgeseUschaft (Metal Research 
Company, ‘MEFO’ for short), and for this reason the bills drawn on 
it were called MEFO bills. The Reich guaranteed all obligations 
entered into by MEFO, and thus also guaranteed the MEFO bills in 
full. In essence all the Reichsbank’ $ formal requirements were met 
by this scheme. It was a question of financing the delivery of goods*; 
MEFO bills were therefore commodity bills. They rested on a 
threefold obligation: that of drawer, acceptor and Reich. This 
provided the Reichsbank with every justification for discounting 
the bills, and, although it was put to every test by the Reichsbank’s 
directorate in collaboration with the country’s best legal brains 
and economists, they agreed unanimously that it was valid. 

The Reichsbank declared itself ready to prolong the bills, which 
true to the form laid down were drawn on three months’ credit, to a 
maximum of five years if so required, and this point was new and un- 



usual. Each bill could thus be extended by a further three months, 
nineteen times running. This was necessary, because the planned 
economic reconstruction could not be accomplished in three months, 
but would take a number of years. By and large such extensions by 
themselves were nothing new with the Reichsbank; it was quite com- 
mon to prolong agricultural bills, but an extension over five years, 
together with a firm declaration that such extensions would be gran- 
ted, that was most unusual. 

One other aspect was even more unusual. The Reichsbank under- 
took to accept all MEFO bills at all times, irrespective of their size, 
number, and due date, and change them into money. The bills 
were discounted at a uniform rate of four per cent. By these means 
the MEFO bills were almost given the character of money, and 
interest-carrying money at that. Banks, savings banks, and firms 
could hold them in their safes exactly as if they were cash. Over and 
above this they proved to be the best of all interest-bearing liquid 
investments, in contrast to long-dated securities. In all, MEFO bill 
credit transactions took place over a period of four years, and had 
by 1938 reached a total volume of twelve milliard Marks. This 
amount was not issued all at the same time, but in step with the 
progress in production. On average, bills to the value of three 
milliards were issued each year. Whether this was the right amount, 
whether more or less was to be issued, depended on the currency 
policy the Reichsbank, decided to pursue. The politicians had 
different ideas. They wanted the highest possible number over the 
longest possible period. After a hard-fought battle, the decision went 
in favour of the Reichsbank. 

This decision was of great importance for currency policy. It 
granted the Reichsbank the opportunity - of which it subsequently 
availed itself - to suspend the MEFO transactions when the currency 
position required that it should do so. The Reichsbank’s task was 
made easier by the fact that until 1938 some half of the MEFO bills 
in issue at any one time were always taken up and held by the market, 
and thus not presented to the Reichsbank for discounting. 

It is true that the system was novel in some of its essential aspects, 
and that it lay outside the normal sphere of activity of a currency 



bank, but it was nonetheless sensible and purposive. The risk lay 
not in its construction, but in the manner and fashion in which it 
was operated. In the first place its application had to be controlled. 
To this end the management of the MEFO company was encrusted 
to experienced Reichsbank officials. It was their task to examine 
all bills, to ensure that they were issued only against deliveries of 
goods, and not for any other purposes. Bills which did not meet 
this requirement were rejected, and finance or loan bills were not 
issued. As soon as the banks, in view of the rising demands for 
credit by the economy, and because of the resulting shortage of 
capital, ceased to be in a position to retain the MEFO bills in their 
portfolios, they to an increasing extent presented them to the 
Reichsbank for discounting. The MEFO transactions had to be 
suspended. This state of affairs could be foreseen in 1937, and set in 
with a vengeance in 1938. 

In 1937 the first price increases became evident, and full employ- 
ment had nearly been achieved. Employers began to compete 
with each other for workers. In the beginning of 1937 I therefore 
informed Hitler that I would be suspending the MEFO credits. 
A long-drawn-out dispute ensued. I threatened to resign from my 
post as President of the Reichsbank if Hitler did not sanction my 
proposed action. A compromise was reached, whereby I would 
continue in office for another year, that being conditional upon the 
suspension of the MEFO credits once they had reached a total 
volume of 12. milliards. Hitler agreed, and kept his word. 

The MEFO bill system was not and could not be a perpetuum mobile . 
As soon as full employment had been reached every farther granting 
of credit could only lead to an excess in the circulation of money, 
and to a rise in the price level, and thus to inflation. This had to be 
avoided at all costs. 

Great care was also needed to ensure the repayment of the bills 
at the latest by their definitive due date five years after their issue. 
When the MEFO system was introduced I fully expected that the 
revitalisation of the economy would result in such progress in the 
growth of incomes and in capital formation that repayment would 



be made possible by growth in taxation yield together with loans. 
This expectation was not only realised in full, it was also widely 
exceeded. In the years between 1933 and 1938 the Reich’s income 
from taxation rose by over ten milliard Marks. In the same period 
I succeeded in placing no less than eight milliards in Reich loan 
stock with the general public. The means to repay the MEFO bills 
guaranteed by the Reich thus existed in plenty, particularly since 
repayment was not due all at once, but was synchronised with the 
growth of the economy. In the five years from 1939 something 
less than three milliard Marks were due for repayment each year. 

In a letter dated 1 September, 1938, the Reich Minister of Finance, 
Count Schwerin-Krosigk, gave an admirable and detailed account 
of the German financial situation. In this letter, addressed to Hitler, 
the Count said: ‘Since your coming to power the method consciously 
pursued is one where large non-recurring expenditure on pro- 
viding employment and on defence is financed by raising credit. 
Insofar as this could not be effected by resorting to the normal 
money and capital market, that is, by means of the yearly increase 
in the savings of the German people, financing was effected by bills 
(labour bills and MEFO bills) which were discounted with the 
Reichsbank. This was therefore the creation of money. Such 
money-creation did not constitute any danger to the currency 
so long as the increase in the quantity of money was accompanied 
by corresponding increase in production. When at the turn of 
1937-38 the condition of peak output had been achieved, the MEFO 
bill system, which had by that time reached a figure of 12 milliard 
Marks, was abandoned, since from that time on there was indeed 
the danger that the system would unleash inflation. Another reason 
why the system could be abandoned, is that the rising taxation 
revenue and growth in savings made it possible to cover expenditure 
by the normal means of taxes and loans. The Reich’s revenue from 
taxes increased from 6*5 milliards to 14 milliards between 1932 and 
I937 '’ 

The MEFO system was a noteworthy example of the fact that it is 
possible to make up for a lack of capital by means of credit without 
any risk of engendering an inflation which causes price rises. The 


II 6 

stability of the currency remained assured. The risk in the whole 
process lay in two directions. Had it not proved possible to arrange 
things in such a way that a large part of the issued bills would be 
retained by the market and thus not presented to the Reichsbank, 
then an excessive use of the bank-note printing presses would have 
been unavoidable. This danger was avoided by making the bills 
rediscountable at any time, and by paying four per cent interest on 
them. The second danger lay in the eventuality that production 
might not have increased to a degree where it would yield a greater 
quantity of material goods and higher taxation revenue. Both 
dangers were foreseen, both were forestalled. 

After the collapse in 194.5 it was repeatedly asked whether the 
success of the MEFO bill scheme did not mean that whenever there 
was a shortage of capital savings one could compensate by replacing 
such capital savings with credits granted by the central bank, and thus 
by money specially printed for die purpose. The English economist 
J. M. Keynes has dealt with the problem theoretically, and the MEFO 
transactions proved the practical applicability of such an idea. 

But the conditions under which the scheme can be applied without 
disadvantages are not always present. They were indeed present 
in Germany during the depression of the thirties. Then there were 
no more stocks of raw materials, factories and warehouses lay empty, 
machines were idle, and six and a half million willing men were 
unemployed. Liquid capital savings which could have been invested 
were not available. Production was restricted to such a degree that 
accumulation of capital could not take place. If rapid capital forma- 
tion was once again to become possible, the powerful but stagnant 
productive resources had to be brought back into operation. The 
capital which could be expected to result from such developments 
was used in advance to grant credit through the MEFO transactions. 
Had the productive activity which was initiated by means of this 
credit gone awry the MEFO experiment would have proved a 
failure. Then the money which had been printed would not have 
been balanced out by capital formation, but would have led to 
inflation. The danger was avoided by entrepreneurial initiative, 
by diligence, discipline and the organisation of the German economy. 


1 17 

The MEFO system functioned and played its role in currency and 
financial policy for five years between 1934 and 1938. It would 
certainly have been wound up according to plan; it was Hitler’s 
war craze which brought it to an unsavoury end. The Reich 
Finance Minister's letter did not make the least impression on Hitler. 
He was instructed not to pay the MEFO bills amounting to three 
milliards which became due in 1939. In a few terse words the 
Minister informed the Reichsbank at the end of 1938 that he was 
not in a position to honour the bills as provided by contract, and 
agreed by solemn promise. This happened, despite the fact that the 
Reich had the means to honour the bills. But Hitler used these means 
to produce yet more weapons of war, and did not shrink back from 
protesting bankruptcy as if he were really unable to pay. 

In the first days of January 1939, the Reichsbank handed Hitler 
a memorandum in which it indicated its refusal to grant the Reich 
any further credits. The consequences were drastic. On 19 January 
I was dismissed from my office as president of the Reichsbank with 
immediate effect. On the following day Hitler issued an edict 
which ordered the Reichsbank to grant the Reich all credits for 
which the Fuhrer asked. It is true the MEFO bills were now honoured 
when they became due, but only with the inflated money produced 
by the printing presses. The second inflation had begun. I refused 
to take part in it. The Reich Finance Minister, whose task it had 
been to declare bankruptcy, remained in office. 

Later on there was much discussion about the reasons why the 
MEFO bill scheme did not unleash inflation. The answer can be 
seen in the foregoing. Every MEFO bill was tied to a quantity of 
goods. Only bills which effected a transfer of goods from one hand 
to another were , granted. Thus the circulation of money and the 
circulation of goods remained in equilibrium. And that is the basic 
principle of currency policy. 

Serious, responsible, and successful as the MEFO scheme was, 
the aftermath which affected me years later was shameful and 
ridiculous. After I had been cleared of all blame for rearmament 
and inflation by the International Military Court in Niimburg, 
and after I had also been acquitted under the denazification law 



passed by the victors, because of my early resistance to the Hitler 
regime, my accusers’ advocates sought in the course of my de- 
nazification to find something culpable in the MEFO bill trans- 
actions. Unfortunately, they could not understand the thing. I spent 
two days of the hearing trying to make myself clear. When on the 
third day the prosecutor asked me to explain the MEFO system 
yet again, I gave up, and replied ‘no’. 

Worse still was the fact that in 1952 the Senate of Hamburg, 
and thus the government of one of the States belonging to the 
German Federation, refused to grant me the right to found a banking 
house in Hamburg, on the grounds diat I had offended against 
business morality with the MEFO bills. Now the entire MEFO 
scheme had from beginning to end been thoroughly investigated 
by the directorate of the Rcichsbank and its colleagues and sanctioned 
and decided upon by all the members acting unanimously. All this 
did not prevent two of these members, the privy councillor, Vocke, 
and later Herr Blessing, from being chosen to manage the Bundes- 
bank, and one other member, Herr Hulse, from becoming manager 
of the Landeszentralbank in Dusseldorf. The Federal government 
and the government of North Rhine-Westphalia were thus far from 
regarding the MEFO scheme as disreputable. Only the Social 
Democratic government of the Hansa town of Hamburg was of a 
different opinion. Twice - once by the administrative court and 
once by the upper administrative court - the Senate of Hamburg 
was taught the facts of the case. But it was only when socialists 
were succeeded by a middle-of-the-road government that this 
shameful drama was brought to an end. The new government 
accepted the verdict of the upper administrative court. The most 
telling sentences of this verdict read as follows: ‘The directorate of 
the Reichsbank was acting in a framework of reasonable monetary 
objectives when, in considering ways of providing advance funds, 
it paid due regard to the fact that an increase in the volume of money 
would also lead to an increase in the level of production. Because 
it was linked with the state’s measures to increase the number of 
employment vacancies, the MEFO bill system was suitable for this 
purpose. It constituted a practicable basis for the conquest of the 



economic depression. The Reichsbank exercised sound judgment 
when at this time it abandoned the rigid adherence to the- cover 
principle, for which the former management of the Reichsbank 
lias been reproached, and sought to fulfil the function of a modem 
commercial bank by providing finance for state investments’. 

When I brought this verdict to the attention of privy councillor 
Adolf Weber, doyen of German economists, he wrote to me ‘At 
last we have a lawyer who has consciously made a serious effort 
to think out economic processes without prejudice. This should 
result in disenchantment with the MEFO mystique even in legal 

For me the legal proceedings contained one conciliatory note. 
When the presiding judge asked why it was that the directorate 
of the Reichsbank had at the time been opposed to my nomination 
for the post of president of the Reichsbank, one of the witnesses, 
the privy councillor, Vocke, answered in four plain words - *we 
made a mistake’. 

My dismissal from the presidency of the Reichsbank coincided with 
the outbreak of the second inflation. On the very day of my 
departure Hitler issued his edict, and die Reichsbank was compelled 
to give the Reich credits of any amount which the Fuhrer might see 
fit. This edict was not made known to the public. Hider must have 
assumed, correctly, that the edict would have immediately been 
linked with my departure from office. That would not have been 
good for the reputation of the German currency. My successor 
in office was the Minister of Economics, Funk. 

Five months after my departure, on 15 June, 1939, the edict of 19 
January was made public in the form of a law. Inter alia it deter- 
mined that the Rcichsbank’s independence was revoked. The 
directorate of the Reichsbank was subject to the dictates of the 
government. The Fuhrer decided the level of credit to the Reich. 
This left the gate to the second inflation wide open. 

The origin, course and consequences of this second inflation have 
not always been identified correctly. It is in nearly all respects 
quite different from the first. The first inflation of the years between = 



1918 and 1923 came upon us like an inescapable thunderstorm. The 
war left Germany completely exhausted financially. Then the 
country was encumbered with paying milliards in war debts. 
Where was the money tor economic and social reconstruction and 
for the war tribute to come from? It would have required decades 
of peaceful economic development. Instead Germany lived under 
the constant pressure of the demands for goods and money made 
by the victorious powers. Only in 1924 with the Dawes plan were 
they brought into a sensible relationship with the possible. Germany 
could do nothing to avoid the first inflation, the blame for its 
monstrous proportions cannot be laid on Germany’s door. 

It is quite different with the second. The National Socialists took 
over the reigns of government at a time when unemployment had 
paralysed the German economy. Amongst the credit policy measures 
undertaken to start production moving again, were some directed 
towards the reconstruction of military defences. Hitler informed 
me that this part of the measures taken would probably be com- 
pleted by 193 < 5 . Until that time Hitler left all measures involving 
economic policy in my hands. He did not trouble himself with 
any of them, since he understood precious little about economics. 
After 1936 it was another matter. Hitler’s military ambitions became 
boundless. The compromise of 1937 recounted above still gave a 
year’s pause. But after this, new money demands led to the Reichs- 
bank’s memorandum of 8 January, 1939 and to my deposition. 

The second inflation did not come as a surprise. It was a conscious 
and intentional measure taken by the political . dictator. The 
Reichsbank did its utmost to prevent it, but it was politically power- 
less. From the day of the decree of 19 January the Reichsbank was 
nothing more than an administrative organ subject to the govern- 
ment, deprived of its own responsibility for currency policy. 

When in 1945 measures were taken to remedy the second inflation, 
I was a political detainee of the Americans. Corrective measures 
were taken by the occupation forces. The attempt to enlist my 
collaboration was thwarted by the preponderance of the Democrat 
over the Republican interests in the United States. A simple and 
easily-undertaken currency correction, as recommended by me. 



became a fearful incursion into the earnings and fortunes of the 
German populace. 

In 1948 a number of American professors were given the task of 
devising a so called currency reform. The report was published 
under the names of Tamienbaum (the German for pine tree) and 
Morgenthau (the German for morning dew). Their proposals 
were soon humorously linked with these names (‘Oh, pine tree, 
how green are thy leaves; one leaves notes outside the window 
at night, and in the morning they are covered with dew’). All old 
notes and coins lost their validity. Everyone received an amount of 
DM 40 in the new money, and employers received DM 60 for 
each employee. The authorities received a month’s requirements, 
post and railways only sufficient for a fortnight. All money claims 
and thus also all bank deposits, savings, etc were reduced to a tenth 
of their nominal amount, without any regard to their economic or 
social significance. Mortgage bonds also lost nine-tenths of their 
nominal value. It is true that this was to the benefit of the debtors, 
but the owners of securities were injured to the same degree. It was 
a completely arbitrary redistribution of wealth without any social 
or economic foundation, the height of injustice. Against this, 
shares, properties, and other material assets remained undiminished 
in the hands of their owners. Their fortunes were left intact. 
Already before the reform their resources had been considerable, 
they were the rich. The small man’s fortune was his savings book, 
which shrunk to a tenth of its former value. The state balanced out 
some part of this unequal load through the introduction of a law 
for equalising burdens, and a mortgage profits tax. 

This transmogrification was not only as complicated as is con- 
ceivably possible, it was also a deliberate, brutal interference with 
the whole social structure of German society, more diabolic in its 
results than the inflation of 1923. The proliferation of the first 
inflation was due to the unpredictable course of historical events, 
here malevolent intention was involved. Did the German govern- 
ment have to acquiesce in these events? Germany had been merci- 
lessly defeated, was surrounded by deadly hatred, and also by a great 
degree of ignorance. Far be it from me to reproach anyone. But I 



will take the liberty of making a general observation. The Germans 
may be bad politicians - whether the success of others is due to 
greater wisdom is an open question - but Germans have always been 
good economists. That is universally acknowledged. For this 
reason Germany should use its economic knowledge and economic 
power to the utmost in the many international negotiations in which 
it is constantly involved. 

Such knowledge and experience will carry even more weight if 
they are linked with initiative and ideas. Whatever influence Ger- 
many has regained in the world today rests solely and entirely upon 
recognition of its economic and political qualities. The mastery of 
the economic difficulties which overtook Germany between the 
two world wars has contributed to no small extent to this recogni- 



The French have a malicious proverb: *Les affaires, cest I'argen 
des <Mtres - business should be conducted not with one s own, 
but with other people’s money. We have seen how the need to 
finance large outlays leads to the utilisation of other people’s money 
as well as one’s own. But the risk inherent in business also leads 
to the spreading of the risk from one’s own shoulders to those of 
others. In economics credit means lending money for productive 
ventures, the profit from which promises to provide the means of 
paying interest on and amortising the loan. Credit presupposes 
confidence and responsibility. Credit is not only dependent on 
the borrower’s ability to pay, there is also the danger that it will be 
either frivolously or maliciously misused. 

The borrower in accepting a loan also accepts a great responsi- 
bility, that of ensuring that he is in a position to make a profit with 
the loaned money. The lender runs the not inconsiderable risk that 
the borrower may not succeed in his enterprise, and thus be unable 
to repay the loan on time and to pay interest during the term of the 
loan. The smooth course of a credit transaction is not always de- 
pendent solely on the personal standing of the borrower or lender. 
Often the general economic situation and its development has a 
disturbing influence on the course of business. A general falling- 
off in boom conditions brings losses in its wake which frequently 
affect whole branches of business and industry. 

Economic history teaches us that crises occur from time to time. 
The first modem economic crisis which hit the. new Germany 
occurred in 1873. It was the crisis which marked the end of the 




so-called ‘founder’s era’ (Griinderzeit). A great deal of money 
had flowed into Germany by way of French war reparations, and 
had led to the founding of numerous businesses. Many of these 
did not earn the hoped-for profits, and a large number of failures 
ensued. This led to default on loans and capital losses. 

The bank crisis of 1901 which caused the collapse of the Bank of 
Leipzig was the main reason why I joined the Bank of Dresden. I 
experienced the next crisis in 1907 while in the service of the Bank 
of Dresden. It suffered heavy losses, but was able to maintain its 
external balance sheet by a piece of face-lifting which involved the 
sale of a number of securities the book value of which was below 
their market value. So far as Germany is concerned, the war and 
post-war years 1914 to 1924 can best be regarded as one single 
continuous economic crisis. I went through it as governor of one 
of the big banks. Towards its end I became currency commissioner 
and president of the Reichsbank. 

Apart from crises brought about by political events, general 
economic crises, as well as the collapse of individual businesses, can 
almost always be ascribed to a faulty credit policy. The flooding of 
Germany with the monies arising out of the French reparation 
payments in 1871, the overstretching of credit linked with it, 
and the flooding of Germany with foreign credits between 1924 
and 1929 are the best examples of this axiom. But the crises of 1901 
and 1907, which were sparked off by the collapse of individual 
concerns, also arose out of a wrong policy of granting credit. 

These experiences have caused the state to exercise supervision 
over the banking and credit system. Naturally these controls are 
only in their infancy, and are often only of limited efficacy. This is 
all the more reason why economic science and economic policy 
have aimed at counteracting the customary fluctuations in market 
conditions with their resulting crises which periodically afflict the 
economy. It is easy to understand that it is the endeavour of every 
economist to avoid every kind of crisis. Since the misuse of money 
and credit plays a large part in such crises, monetary policy is 
particularly important in this respect too. Even if an erroneous 
financial policy pursued by the government cannot be compensated 



or merely by currency manipulations, the policy of the central 
bank can yet intervene in many ways to influence the development 
of a crisis. 

The ideal of all economic policies is a level of employment of 
the entire working population, which is constant and keeps pace 
with the growth of population. A large degree of unemployment 
brings social difficulties in its wake. In the past we have learnt how 
to conquer them. What we have not yet learnt is how to cope 
with the difficulties which are caused by over-employment. And 
we are still miles away from the ideal of a balanced labour market 
and an increase in the volume of employment which keeps pace 
with increases in population. Unfortunately the sufferings and 
deprivations of unemployment arc felt immediately, while the 
mistaken consequences of over-employment do not show themselves 
until some time later. The condition of the German economy today 
with its one and a quarter million foreign workers is no less hazardous 
than it would have been with a million unemployed - perhaps it is 
even more so. 

The post-war crisis of the ’twenties was temporarily solved by the 
import of massive foreign credit. The robbery with violence 
perpetrated on Germany by the French occupation of the Ruhr 
was checked by the adoption of the Dawes plan. The leading idea 
of the Dawes plan consisted in the attempt to discharge the milliards 
demanded by the allied victors as reparations out of the economy’s 
earnings. The hopes on which the Dawes plan was built rested on 
Germany’s peaceful development. For this reason foreign countries, 
particularly America, granted Germany large amounts of credit 
in order to help the economy to its feet. Despite this, in the six 
years between 1924 to 1930 there was not a single year in which 
Germany was able to achieve an export surplus large enough to pay 
the annuities due on the Dawes plan. These annuities were paid with 
credits. Taken all in all, in these six years Germany took up loans 
in foreign currency to a value of some twenty milliard Marks. One 
half of these foreign monies were changed into German Marks 
and used for internal purposes. The other half was used to pay the 
Dawes annuities. This half of the loans granted was thus in no wise 



used for those productive and profitable investments, which are of 
the essence of any credit; instead, this money was spent without the 
least economic effect or benefit Here, we may well have the 
crassest conceivable example of how not to use credit, and thus also 
how not to grant or accept credit 

From 1924 onwards the Reichsbank, year in year out, at every 
opportunity, clamoured with increasing fervour for a limitation of 
foreign credits. No German government between 1924 and 1930 
could make up its mind to take the decisive measures required, since 
they all feared the political consequences. Thus nothing intervened 
to prevent this excessive taking up of foreign credits for what were 
often very unsatisfactory purposes. In 193 1 all this finally resulted in 
the greatest financial crash Germany has ever known. I wish to make 
only cursory reference to these happenings, because this period in 
our history is sufficiently well known, but I must insist upon the size 
of the crisis. One must recall its severity and extent in order to 
comprehend its momentous impact. Germany’s financial and 
economic emasculation which had begun with the war continued 
after the cessation of hostilities. The reparations rendered by Ger- 
many between 1919 and 1923 in terms of goods and services, were 
estimated by the Americans to amount to 38 milliard Marks. The. 
official German estimate is 54*4. Until 1924 it was impossible to 
think of reconstruction. Then came six years of normal economic 
working, furthered by twenty milliard long-term, and 6 to 8 
milliard short-term foreign credits, until the international crisis of 
the autumn of 1929 brought these credits to an end. 

In the spring of 1931 the largest Viennese bank, the Osterreichische 
Kreditanstalt (Austrian Credit Institute) was compelled to suspend 
payments. This failure also increased the mistrust foreign lenders 
felt towards Germany. Many short-term loans were called in as a 
result. Week by week the Reichsbank saw its reserves of gold and 
foreign currency shrink, and this in its turn led to an acceleration in 
the withdrawal of loans on the part of foreign creditors. On 1 July, 
1931, the Norddeutsche Wolikammerei in Bremen suspended 
payment, and this resulted in its largest creditor, the Darmstadter 
und Nationalbank, also suspending payment. Banks, savings 



banks and stock exchanges were compelled to close their doors. 
A considerable number of banks all over the Reich suspended 
payments. A hundred co-operative society banks had to be given 
financial support. Countless industrial concerns failed. 

Only a few well-known firms will be mentioned here. In Decem- 
ber, 1931 the locomotive and machine construction firm of Borsig, 
nearly 100 years old and known all over the world, stopped pay- 
ment. In the same month the Hannoversche Machinen AG found 
itself in financial difficulties. The telephone manufacturing company, 
Berliner AG, lost more than half of its share capital and its entire 
reserves. The Korting AG had difficulties in honouring its payment 
commitments. The Bing-Werke AG in Nurnberg was compelled 
to suspend payments. The famous aircraft factory of Junkers in 
Dessau had to declare a moratorium and to seek state help. Vogt- 
landischc Machinenfabrik AG went bankrupt. Especially significant 
was the fact that the Hamburg-American Shipping Line and the 
Norddeutsche Lloyd as well as other shipping lines were in such 
difficulties that the state had to come to their aid with loans. In 
spring 1932 over 30 per cent of Germany's mercantile fleet was idle. 
By September, 1932 this figure had reached 3 6.6 per cent. In 
the course of 1932 a large number of companies were forced to 
use their reserves, and on top of this to eat into their capital. A 
special emergency decree' was passed making it easier to reduce 
capital. In the first nine months after this decree became law 659 
companies reduced their capital by a total of one and a half million 

Farming was equally affected by this slump. It became the victim 
of an excessive debt. Agriculture was granted some relief by the 
moratorium contained in the law for aid to the eastern regions. 
The mortgaging of seed, fertilisers and natural products was sus- 
pended. A number of municipalities, including towns such as Dort- 
mund and Essen, had to discontinue interest and amortisation pay- 
ment on their loans. The social consequences of the crisis became 
evident in the following years. By the end of 1932 a third of the 
working population was unemployed and had to be maintained on a 
subsistence level by means of state funds. This meant that in the 

12 % 


densely-populated industrial areas every other family was without 
work and income. The political consequences did not stay far behind 
the social ones. The National Socialist movement grew by leaps and 
bounds, and led Germany to the Hitler dictatorship. 

All attempts to stave off the crisis failed. Most astonishing was the 
central bank’s passivity in the crucial months of 1931. The influence 
which the Reichsbank had over the business behaviour of the private 
banks should have enabled it to see the red light in the withdrawal 
of foreign short-term monies. The Reichsbank itself had after all 
drawn attention to the dangers inherent in the excessive foreign 
loans for years. But even if the Reichsbank was not absolutely in the 
clear about the position in which the banks found themselves in 
regard to their foreign obligations, it could not fail to see from its own 
weekly returns that foreigners were to an increasing extent recalling 
their loans - the resulting transactions would have been easily 
discernible as outside the context of the normal transmission of 
payment. Even if at first the signs were somewhat blurred, after the 
day on which the Austrian Krcditanstalt collapsed, the Reichsbank’s 
weekly returns spoke with one unmistakeable voice. 

A central currency bank can meet any internal run on the banks, 
and every payment difficulty encountered by trade and industry, 
so long as it involves only the home currency. The central bank is in 
a position to create as much currency for home circulation as it 
wishes by resorting to the bank-note printing presses. Obligations 
expressed in foreign currency can however be settled only by means 
of foreign assets and out of gold reserves. There was no need for 
the Danat bank to close its doors that July with a crash which 
unleashed panic, particularly since it was still not clear whether 
excessive indebtedness or inadequate liquidity was involved. It 
must have been within the Reichsbank *s powers to ensure that the 
Danat bank and the remaining banks were able to pay by granting 
them sufficient credit. Even if the worst came to the worst - that is, 
had the final account revealed losses, these losses could have been 
guaranteed by the state. This would have been cheaper for the 
Reich than the total loss, amounting to four hundred million Marks, 
which resulted from these failures. And it would also have been 



possible to spread the final loss, or some part of it, over all the German 
banks. All banks should, for their own sakes, have been interested 
in helping each other. They could not but have known beforehand 
that the results emanating from this, the most resounding bank 
crash in German history, would be to the detriment of the entire 
banking system. 

But even if the Danat bank had been able to raise sufficient sums 
in the home currency to acquire the necessary foreign exchange it 
would have remained apparent that Germany would be unable to 
meet its foreign debts. The Reichsbank was unable to supply or 
acquire sufficient quantities of foreign exchange. Every foreign 
creditor could predict, on the basis of the weekly returns, when the 
Reichsbank would reach the stage where it had no more foreign 
exchange at its disposal. The over-anxious efforts on the part of the 
Reichsbank to obtain foreign stand-by credits in gold or foreign 
exchange could do nothing but increase the anxieties of foreign 
creditors - with the result that all who were able to call in their loans 
without any breach of contract did so. 

The only possible way in which the foreign payments crisis 
could have been countered would have been to declare a moratorium 
of debts expressed in foreign currency. The earlier such a morator- 
ium was declared, the more calming it would have been, and the 
more likely that reasonable arrangements for the gradual liquidation 
of the foreign credits over an extended period could have been made. 
Of course, it is not always permissible to translate concepts applicable 
to the economics of individual concerns to political economy at 
large. But according to civil law, a debtor who, knowing he is 
unable to pay his debts in full, yet makes payment to some of his 
creditors, without making his inability to pay in full generally 
known, is committing an offence. However, the Reichsbank, 
although it clearly foresaw that its ability to pay would soon come 
to an end, continued to pay every foreign creditor whose con- 
tractual obligations enabled him to call in his loans, while those 
creditors whose loans were not due for repayment until a later date 
received nothing. 

When the Reich chancellor, Br lining, asked me to participate 



in the turbulent discussions on how to stop the crisis, none of my 
proposals were adopted. Against my advice the government decided 
to indemnify all creditors of the Danat bank. I emphatically repre- 
sented the view that only the small depositors should be protected 
by a state guarantee. I maintained that the large money lenders 
(amongst whom there were also many foreign banks) had the 
duty, and were also in the position, to ascertain for themselves 
whether or not the Danat bank was sound and whether or not it was 
able to honour its obligations. They should, therefore, have had to 
depend on a liquidation of the bank’s assets for recovery of their 
claims. I also insisted that the capitalistic economic system could be 
maintained only if one could bring the individual’s responsibility 
for the husbandry of his own capital to bear where necessary. 

The manner in which the bank crash of 1931 was handled by the 
vested interests and the government of the Reich made a large 
contribution to the discrediting of the private capitalistic economy. 
To what degree the blame should be apportioned to private in- 
dividuals, to the Reichsbank, and to the government, remains an 
open question. An economy based on private capital is justified 
only if the entrepreneurs who profit from their enterprises are 
equally prepared to bear losses when they occur. The proprietors 
of the Danat bank were by statute liable for the bank’s losses with 
their personal fortunes. Yet they were not made answerable, but 
instead, as a result of the state guarantee to creditors, they went scot 

This was the financial and economic situation when in March, 
1933 I was once more called to the office of President of the Reichs- 
bank. For six long years, from 1924 to 1930, I had sought with all 
,my power to keep Germany’s indebtedness to countries abroad 
within reasonable bounds. Again and again I had pointed out 
publicly and in discussions with the government of the day and 
with economic leaders, that foreign credits were expressed in foreign 
currency, so that foreign exchange would be required for interest 
and amortisation payments, but that the German economy was not 
earning a sufficiently large surplus of foreign exchange to enable it 
to honour payments on excessive foreign credits. Germany was 



completely and utterly dependent on foreign confidence. When 
this confidence was squandered away, Germany’s inability to pay 
came to light all too clearly. 

Nevertheless, it would have been possible to avoid the catas- 
trophe developing had a moratorium on the repayment of foreign 
debts been declared in time by a decision taken freely and cour- 
ageously. The extent and method of enforcing such a moratorium 
would have had to be agreed after its proclamation and not before. 
However, since no one had the courage to make his own decisions 
and put his own ideas into practice, cleaning up the financial and 
currency mess had now to be done under the influence and subject 
to the pressure of the foreign creditors. 

I was persuaded to accept office as Reichsbank president not by the 
need to regulate the foreign debts, but by the desperate plight of the 
six and a half million unemployed, which, if left unsolved, would 
without 3 doubt have resulted in Germany turning to communism. 
My taking up office followed upon a discussion of fundamentals 
with Hitler. The starting-point of this discussion was the axiom 
that the creation of work for the six and a half million unemployed 
must be the first and highest priority. This required a great deal of 

‘Have you any idea what sums might be involved?’ asked Hitler. 

‘It seems to me quite impossible to estimate any sum out of the 
blue, since there is no way of ascertaining the volume of orders 
which would be necessary to get the economy moving.* 

‘But surely you must be able to indicate to what extent the 
Reichsbank can be of assistance?’ 

‘Herr Reich Chancellor,’ I replied, ‘I really cannot give you a 
definite figure, I only know that unemployment must be abolished, 
at all costs. The Reichsbank 'will have to grant as much credit as is 
necessary to achieve this end.’ 

In these words I summarised for myself the task which was then 
entrusted to me. I was not motivated by vanity, profit-seeking, nor:; . 
even by party-political ties which I did not possess, but only by" 
concern for the welfare of the masses. The creation of jobs needed ' 



capital on which interest and amortisation payments had to be made, 
just as they had to be made on foreign credits, for which money 
was also needed. But no capital was available. The productive 
resources by which new capital could grow lay idle. New granters 
of loans were nowhere in sight. It would be a long time before 
credits from abroad would once again become available. At all 
events, I wanted to be in a position to negotiate with the foreign 
creditors over the postponement of Germany’s debt obligations in 
such a way that I would regain the necessary confidence in Germany’s 
willingness to pay, and in her efforts to acquire the wherewithal 
to pay. 

There are two kinds of diplomacy. One is to solve all problems 
on one’s own side, the other is to present the other side with prob- 
lems. In the crisis over the foreign debts, Reichsbank and govern- 
ment alike preferred the first way. I had other views. I had always 
warned foreigners about granting excessive credit. I had predicted 
that should these loans exceed the required volume, it would become 
impossible to honour their interest and repayment conditions in 
addition to making reparation payments. The volume necessary 
was determined by the materials from abroad needed for 
Germany’s industries, and the foodstuffs from abroad needed to 
feed her population. This and no more. My intention to compel 
the other party to share in the responsibility for the problem stood 
me in good stead in the negotiations over the regulation of Germany’s 
indebtedness which I conducted with her creditors. No one could 
accJse me of an unfair attitude and all had to acknowledge the 
fraffleness of my appeal. 

Before 1933 the German government did not take any kind of 
initiative to arrange an international discussion of the debt problem. 
It allowed the world to remain firm in the belief that everything 
could be solved by the Dawes plan. It was left to the American 
reparations agent Parker Gilbert to express the first doubts about the 
ultimate outcome of the Dawes plan. This was in 1927, when 
Gilbert also urged that a new conference be called. Such a con- 
ference took place after a new committee of international experts, 


chaired by die American Owen D. Young, had re-examined the 
Dawes plan, and suggested certain alterations. In January, 1930, the 
Young plan led to the government conference at The Hague. At 
this conference too, the government of the Reich had an excellent 
platform for airing its views. Quite apart from the fact that the 
Young plan reduced the yearly annuities payable under the Dawes 
plan by a small amount, it contained the same condition which had 
been embodied in the Dawes plan, namely that the plan must be 
accepted or rejected by all governments in its entirety without any 
amendments whatsoever. Removal of individual clauses and 
alteration of any stipulations was not permitted. The German 
government thus needed to do no more than stick to the letter of 
this condition in order to place itself into an unimpeachable moral 
and legal position. And in view of the financial crisis which had 
broken out a few weeks earlier, the German government would 
have had the entire international business world on its side. 

Unfortunately the German government missed its chance. The 
admittedly ovcrwceningly great desire to end the foreign occupa- 
tion of the Rhineland seduced the government into submitting to 
hostile demands which diverged from the Young plan. The 
political threat that the Young plan would not be adopted, and that 
as a result the Rhineland would not be cleared of foreign occupying 
forces, unless Germany agreed to the foreign claims, triumphed 
over the opportunities offered by the Young plan. Politics deter- 
mined the decision. Germany regained the Rhineland at the 
expense of payments higher by several hundred millions, and above 
all at the cost of renouncing German property in the regions ceded 
to Poland. This property was worth more than two milliard 
Reichsmark. I saw this readiness to yield less in terms of tem- 
porary political advantage than in terms of a permanent loss of 
financial trustworthiness. One could not expect a government 
which so friyolously gave away claims to property and capital to 
make any serious efforts to tackle the reparations problem in a way 
which would ultimately lead to an economically rational solution., 
A financial policy such as this could only lead to economic disaster. 

I resigned from my post as president of the Reichsbank, 



My resolve was reinforced by the failure of the Reichstag in the 
field of monetary policy. If an honest attempt was to be made to 
fulfil the conditions of the Young plan, the utmost economy 
would have to be the aim of internal financial policies. The Social 
Democratic Reich Chancellor, Hermann Muller, had the best will 
in the world to achieve this end. He laid before parliament the 
draft of a finance bill which in its essentials corresponded with the 
measures proposed by me. However, he was opposed by his own 
party, and compelled to leave office. The foreign loans by which 
Germany had hitherto paid the instalments due under the Dawes 
plan dried up because of the world wide economic crisis. Yet 
after the adoption of the Young plan the German government again 
permitted the world to continue in the belief that the amounts 
demanded by the Young plan would be met. Since hitherto the 
amounts due under the Dawes plan had been paid solely out of 
foreign loans, it was clear to everyone with any insight at all that 
without such loans Germany would certainly be in no position to 
pay the amounts due. 

In the summer of 1930, after The Hague conference, I undertook 
a private journey to the United States. I had been asked to deliver 
some lectures, and had prepared a few subjects. On my arrival in 
New York I found myself so much in demand that I had to take 
steps to prolong my stay. Although I had prepared lectures on a 
number of themes, everyone wanted me to talk about one subject - 
that of the payment of reparations. I lectured on this to bankers, 
industrialism, professors, and students, in some fifty towns in every 
comer of me United States. I gave talks in universities, to economic 
associations and general meetings, in Yale, Harvard and Stan- 
ford, in towns from Philadelphia to Los Angeles. Everywhere public 
interest was extraordinary. Although I explained that the making 
of reparations payments under the Dawes or Young plans was 
altogether questionable, and that the whole world economy was 
injured by them, I never encountered any expression of ill-will. 
This was clear from the discussion which followed each of my 

At the end of my two months’ tour a publisher came to see 



me and urged me to publish my lectures in book form. We delib- 
erated about the title, and soon decided on The End of Reparations. 
The book was published first in the United States, and then in 
Germany and England. It proved a best-seller. That my lecture 
tour benefited Germany’s case should have been apparent to the 
German government too. It was not even necessary to take any 
particular line on the views I had expressed. In answer to any 
questions which might be posed, a simple statement to the effect 
that my expositions were the views of a private business-man would 
have sufficed. Unfortunately, the government chose a different 
approach. In my first lecture, given at the behest of the German- 
American Chamber of Commerce in New York before some 
600 invited guests from all sides of the business world, I had said 
‘If reparation payments continue to be made by the means now 
used, then a time will certainly come when the transmission of 
German payments in foreign currency will no longer be possible'. 

My lecture was broadcast by a large radio network without any 
incident. The trouble only began later, because on the same day, 
a few hours after my lecture, the German Minister of Finance, 
Dietrich, declared at a press reception in Berlin that Herr Schacht 
was not authorised to make such statements, and in no wise ex- 
pressed the views of the German government. I myself had never 
made such a claim. But the unpleasant thing about Dietrich's 
statement was that it could not but give the impression that the 
German government considered it would be possible to continue 
paying reparations in accordance with the Young plan. 

The same thing happened when, having given a talk in Stockholm 
in March, 1931* I was asked by a reporter what I would do if I 
became Chancellor tomorrow, and answered ‘I would stop repara- 
tion payments the very same day’. Here, too, it was a case of views 
on economic affairs expressed by a private German citizen. This 
did not prevent the government from once again promptly and 
publicly repudiating my statement, thereby again giving the im- 
pression that the Reich government considered continued reparation 
payments to be practicable. While I was constantly endeavouring 
to give foreigners something to think about where the problem ‘ 



of reparation payments was concerned - and thus to throw the ball 
into their court - the government ever and again frustrated my 
efforts by adopting an official attitude, which contradicted my 
private pronouncements, without the slightest justification. 

Fortunately the campaign which I undertook in America to 
throw some light on the subject of reparations was not entirely 
confined to the general public. In the course of my journeys I 
had private talks with a whole series of politicians. Most impressive 
was my visit to the American President, Hoover. I first became 
acquainted with him during the First World War while carrying 
out my duties with the occupation authorities in Belgium. Here 
Hoover gained the confidence of the Belgian people and put them 
very much in his debt, because he organised American help for 
civilians. Hoover became president of the United States in 1928, 
and it was his misfortune that the world economic crisis broke out 
during his term of office. Hoover was by far the most distinguished 
American of his time, bu t in the face of this catastrophe he, too, was 
impotent; he was not re-elected in 1932 for this reason. Economic 
depressions of such magnitude are as a rule followed by great 
social changes. 

In a completely private discussion in the White House which 
lasted nearly an hour. I gave Hoover a comprehensive -exposition 
of Germany’s economic position, and pointed out to him the 
absurdities of the war tribute which masqueraded under the name of 
reparations. I found him to be extremely understanding. Half a 
year later, in June, 1931* Hoover pushed through the moratorium 
on reparation payments which set the seal on their end. Once 
again, the initiative for this moratorium came not from the German 
but from the American side. 

The collapse of the Darmstadter und Nationalbank took place a 
few days after the Hoover moratorium. This heralded the high’ 
water mark of the German bank crisis. Until that day the Rcichs- 
bank had without hesitation paid from its gold and foreign exchange 
reserves all that was due on the withdrawn foreign credits. It held 
firm in the belief that the withdrawals of credit would cease if 



demands for repayment were met promptly. It did not foresee that 
the opposite -must needs take place. Since the foreign creditors 
could see from every weekly return by the Reichsbank how quickly 
the gold and foreign exchange reserves were dwindling, everyone 
hurried to get his money back before zero point was reached. 
Instead of decreeing a moratorium on such foreign exchange pay- 
ments, everyone waited, until the collapse of the Danat bank made 
payment suspension inescapable. 

The Hoover moratorium applied only to reparation payments, 
and not to the remaining foreign debts. The bank crisis showed that 
a moratorium was necessary for these debts too. Amongst such 
debts the short-term loans clamoured most strongly for repayment. 
They had been granted mainly by foreign banks. Once again it was 
the foreigners, not the German Reichsbank or the German govern- 
ment, who took the initiative in effecting the regulation of their 
repayment. Already on the third day after the collapse of 13 July, 
the London acceptance banks and die competent New York banking 
houses decided to prolong all German obligations due in the next 
three months. This three-month extension of the loan period was 
followed from time to time by discussions about the postponed 
repayments, with the result that the rate of repayment was syn- 
chronised with the availability of foreign exchange. The foreigners 
pressed for an exchange control system such as the Reichsbank had 
hesitated to introduce until the collapse overtook it. Now on the 
basis of the negotiations with the foreigners exchange control was 
introduced, and on several occasions before the year’s end it was 
made more stringent. Although an economy subject to exchange 
control came into being because of Germany’s inability to pay, 
it is interesting to recall that this exchange control was introduced 
on foreign insistence. Exchange control and payment suspension 
slowly brought about a partial improvement in the situation. 

The problem of repaying the long-term debts remained. Without 
taking the reparations into account, these amounted to three times 
the volume of the short-term debts. In July, 1932, the German 
Papen government succeeded at the Lausanne conference in coming 
to an agreement whereby the reparations creditors renounced 



further reparation payments. The loans, amounting since 1924 to 
some 20 milliard Marks, remained. Interest and amortisation pay- 
ments were still due on them. 

I could not understand why the German authorities had exercised so 
little initiative in tackling the bank crisis and its consequences, although 
signs of this development could be seen long before it took place. 
This passive debtor diplomacy was not to my liking. When I once 
again took over the direction of the Reichsbank in March, 1933 , 1 
turned my attention as quickly as possible to the need for measures 
to regulate long term foreign debts. A delay of two months was 
occasioned by the fact that in April, 1933, the German government 
sent me to Washington to prepare for the world economic con- 
ference which had been instigated by the United States, and which 
had for its aim the ending of the world economic crisis. For three 
and a half years this crisis had disrupted the international money and 
credit system. Now all countries participating in world trade 
had been invited to London for talks about ways and means of 
ending the crisis. 

My discussions with the American president, Franklin Roosevelt 
and che foreign minister, Cordell Hull, in April, 1933, gave me the 
opportunity to acquaint them with the hopeless financial and 
political position in which Germany found itself. After a few 
discussions for which I had prepared my brief I frankly explained 
to President Roosevelt in the presence of his foreign minister, 
Cordell Hull, and the German ambassador, Luther, that it would 
shortly become necessary to suspend for the time being all payment 
of interest on the loans granted to Germany. Roosevelt’s reaction 
was quite astonishing. I had expected an indignant response, instead 
Roosevelt slapped his thighs and exclaimed laughingly 'Serves the 
damned Wall Street bankers right’. Naturally on the next day Cordell 
Hull handed me a letter which he had no doubt instigated himself, 
in whiejf the President expressed himself as extremely shocked 
by myfexpositions. I did not take this letter very much to 
heart. A shock received 24 hours after the event cannot be 
very serious* Hull and Luther were the only ones who were really 


The London world economic conference was a shot in the dark. 
It did not bring one single positive result. I therefore concluded the 
final speech of the German delegation with the following words 
‘It will be necessary for each country to put its own economic 
house in order first of all. Once this has been done perhaps a 
new world economic conference will have a chance of succeeding’. 

I myself took immediate steps to put Germany’s economic house 
in order. Even before the beginning of the London world economic 
conference in June, 1933, I had, after my return from the visit to 
Roosevelt, asked foreign bankers as representatives of Germany’s 
creditors to come to Berlin for discussions. They all arrived: 
from England, France, USA, Belgium, Switzerland, Holland and 
Sweden. I began our discussions by observing that an honest 
debtor was obliged to give his creditors a full and frank account of 
the state of his income and capital resources. The Reichsbank 
performed this obligation in every particular. I gave the august 
banking gentlemen every opportunity to examine our books. In 
the ensuing discussions I pointed out that we Germans were better 
able tojudge our position and our potentialities than foreigners could, 
and that we would therefore be in a better, indeed, perhaps even in 
the only position to make suggestions which would best enable us 
to satisfy our creditors. My expositions found unanimous assent, 
and together, debtor and creditor, we laid down the basic principles 
which should be taken into account in the future. These basic 
principles were: 

a) It was agreed that the gold and foreign exchange reserves stall at the 
disposal of the Reichsbank had reached such a low ebb that a further 
drain could not but jeopardise the fuD function of the bank as the central 
currency institution, and that it was therefore desirable to increase this 
reserve step by step. 

b) It was further acknowledged that the fall in the German balance of 
payments surplus made it essential to consider ways of protecting and 
extending Germany’s foreign exchange earnings. 

c) It was generally acknowledged that it was necessary to promote 
German exports of goods by all possible means, since this was the only 
way in which full resumption of payment transfers could be effected, and 



that m the last resort large international debts and obligations could only 
be settled by means of goods and services. 

These conclusions reached jointly with the foreign creditors must 
serve to disarm all reproaches which allege that the debtor made one- 
sided decisions without heeding the views of his creditors. The 
creditors acknowledged that further losses of gold and foreign 
exchange could not be permitted. On the contrary, the stocks of 
gold and foreign exchange would have to be renewed. It was 
acknowledged that payments could be made only on the strength 
of increased exports. 1 built on these foundations, accepted by the 
creditors. I maintained the view that we were not dealing with a 
moratorium in the debtor’s favour. The debtors should be obliged 
to meet their obligations, as before, in German currency. It was 
merely a case of a delay in effecting the transfer from German into 
foreign currency. The debtor's liability to pay in full remained. 

In order to reassure the creditors in this respect, insofar as this was 
within my power, I instigated the law of 9 June, 1933, which 
brought into being the so-called foreign exchange clearing office. 
Into this office, which was under the Reichsbank’s management, 
the German debtors were obliged to pay the amounts due in interest 
and amortisation. Transfer in foreign currency would then be 
undertaken by the Reichsbank as soon as and as far as this proved 

Naturally, the suspension of interest and amortisation payments 
was not a pleasant thing for foreign debtors. But there was no other 
way out. The creditors were left with two alternatives: either they 
could wait until a transfer of the amounts accruing to them was 
possible, they could find other uses for their credit balance with 
the for<*n exchange clearing office. I employed every opportunity 
to introduce such other uses. I freed moneys for every use within 
Germany which did not lead to the export of money, goods or 
services. Thus, for example, there were funds for journeys and holi- 
days in Germany, for gifts or relief to German relatives or friends, 
and many other similar tilings. Many jokes were made about the 
different sorts of Mark I created in this way. But when after the 



Second World War England found itself in similar currency diffi- 
culties and was compelled to introduce partial foreign exchange con- 
trol, she also initiated very similar ways of utilising sterling balances. 

The different varieties of Mark were dealt in quite legally and 
freely on the stock exchange, and naturally they were quoted at a 
discount. On selling his Mark balance the creditor lost part of his 
outstanding debt. The consideration which influenced his decision 
to sell or not to sell was whether he could not do better with a 
smaller capital sum available immediately than with the full 
amount for which he might have to wait many years. If he possessed 
a German bond yielding five per cent and found it possible to earn 
8-10 per cent if he cashed the bond immediately, it was to his 
advantage to sell his German bond at a discount. I never compelled 
any foreign debtor to forgo a part of his outstanding debt. The 
choice whether to wait, or whether to utilise his outstanding debt 
immediately by realising it at a discount, was always left to his own 
free decision. After all, I myself was not responsible for the transfer 
moratorium. It had been instigated before I came on the scene. 

The negotiations with the foreign debtors took place in an atmos- 
phere of good intentions. In respect of Germany’s foreign indebted- 
ness a deferment was the only solution. To create work, money had 
to be provided immediately. Here the Reichsbank could help only 
by means of generous grants of credit. The first measures to create 
work were those comprised in the programme supervised by the 
State Secretary, Reinhard, whereby improvements and renewals of 
houses, factories and machines were undertaken. Then came the 
building of the autobahns. In addition, all the projects of the 
provincial authorities which had been suspended for lack of money 
were once again set moving. In the second half of 1934 to safeguard 
defence, the task of rearmament was added to these earlier projects. 
The means by which we overcame the problems attendant on all 
this was shown in the last chapter. 



The two world wars taught us certain lessons about the nature 
and management of money. The creation of money is harmless 
only if it is accompanied by a simultaneous increase in the quantity 
of services and goods. To render payment without receiving any 
equivalent value is possible only to a very limited extent. Often 
such payment is damaging economically. This is just as true for the 
national economy as it is for the economy of the individual. Gifts 
and expropriations (robbery, war tribute) are exceptions which are 
uninteresting from the point of view of political economy. The 
party political slogan ‘prosperity for everyone’ is based on false 
premises. Permanent and sufficient prosperity comes only to those 
who diligently and ably work for it, those who acknowledge and 
fulfil their economic responsibilities. They deserve prosperity, the 
lazy and incapable must be satisfied with a guaranteed minimum 
level of existence. 

Inflations do not hit everyone to the same extent. Both German 
inflations, that of 1923 and that of 1945, brought changes in incomes 
and fortunes in their wake which affected different sections of 
*taai£y in quite different ways. Readily realisable monetary re- 
sources are more rapidly eroded than hard-to-realise material goods. 
For this reason owners of money, those who have claims to money, 
particularly pensioners, and those living on fixed incomes, always 
suffer more as a result of inflationary falls in the value of money than 
do owners of tangible assets. 

Especially useless are arbitrary changes in the value of money. 
When Austria was annexed in the spring of 1938 Hitler had the 




bright idea of giving the Austrian Schilling a value higher than its 
market value of *50 Reichsmark, because he thought he would 
thereby be giving the Austrian workers a present. The Reichsmark 
became legal tender in Austria. While the market would have 
paid two Schillings for a Reichsmark, one Mark was made equal 
to one and a half Schillings. I tried hard but unsuccessfully to 
dissuade Hitler from putting his idea into practice. Its effect was 
that all Austrian prices rose immediately by a corresponding amount 
so that economically-speaking nothing changed. What did result, 
however, was a great deal of office work, because all balance sheets 
and account books had to be converted to the new parity. All 
owners of mortgages, bonds etc and thus all the capitalists (amongst 
whom were many Jews) received a free gift. The masses went 
away empty handed. 

The little man abhors inflations not only because it makes saving 
very difficult or impossible, but above all because it makes the rich 
richer and } the poor poorer. Inflation upsets the social structure. 
Owners of material goods gain, savers of money lose. Every 
inflation intensifies the battle for a share of the social product. 
The inflation ill which we find ourselves today has contributed to 
the increasing number of wage claims made by the unions. The 
first inflation of 1923 was forced on Germany from outside. The 
second inflation of 1945 was deliberately brought about by Hitler. 
Today’s third inflation is due to both external and internal political 
factors. The danger signs indicating the approach of an inflation 
can be recognised from afar. And it is possible to take counter- 
measures. After the deflation years of the first half of the ’thirties, 
1938 again saw full employment with an attendant shortage of 
workers, rising prices, and lack of capital. These were the storm 
signals heralding Hitler s inflation. In 1956. as a state of full employ- 
ment had again been reached, there was once more a high demand 
for labour with rising prices and a shortage of capital. The signals 
showed that an inflation was imminent. 

The economic policy which led to full . employment by 1956 
was basically correct. It was founded on the recognition of the 
immense need for reconstruction after the chaos left behind by the 1 



war, and also on the newly emergent demands coming from the 
many countries which had recently become independent and were 
now entering world trade in their own right. Their dearest wish 
and immediate goal was to reach the technical and cultural level 
of the industrialised West as rapidly, as possible. Industrial countries 
were faced with a practically limitless demand. 

Unfortunately in Germany this boom was fostered too strongly 
by the encouragement of greater home consumption (exhortations 
to buy vacuum cleaners, refrigerators, washing machines) as well 
as by copious investment aid (tax reliefs and concessions, subsidies, 
extensive and cheap credit). As a consequence frugality, and the 
need to reduce costs wherever possible, was forgotten. Many 
expenses (promotion and business entertainment) as well as luxuries 
like prestige buildings could be written off as tax-free deductions. 
This was the origin of the popular suggestion that half of every 
outlay on expenses is paid for by the Exchequer. Tax concessions 
made it easier for Urge concerns in particular to finance themselves 
from their own resources. The professions and others belonging 
to the middle classes could not accumulate new savings at the rate 
which was needed. The capital market, which in normal times 
had given industry powerful financial assistance, could not keep 
pace with the rate of development. 

The grave social implications of the above lie in the fact that 
irJHtjcinain all these concessions favoured the owners of real values 
who aneady had large capital resources. Amongst such concessions 
were the extraordinary depreciation allowed under Articles 7c and 
7d of the income tax law, and Article 3 6 of the investment aid law, 
which were in the first instance designed for the building firms, 
the wharfingers, and the so-called basic commodity concerns. 
This policy is a little reminiscent of Louis Philippe’s ‘Messieurs, 
enrichessez vous\ By means of regressive depreciation more than 80 
per cent of the value of a plant could be written off tax free in the 
first five years of its life. Some 50 million DM which could have 
been paid out in dividends were withheld from the capital market as a 
result. This financing out of one’s own means was accompanied by a 
steadily increasing volume of bank credit. 



The inflationary developments came into public view most 
prominently through the figures issued by the central bank. The 
fact that in 1938 with a population of 70 million and in a condition 
of full employment a note circulation of eight milliards was suffi- 
cient, while at the present time also in a condition of full employ- 
ment but with only 50 million inhabitants, double this amount 
has been reached, presents us with a phenomenon which cannot 
be healthy or right. The warning notes sounded by all this were 
not heeded by those who shape Germany’s economic policies. 

In June 1956 I gave a lecture before an audience of members of 
the association of young employers and the junior section of the 
association of independent employers in Essen. In this lecture I 
first made public my views on this development and its consequences 
and implications. As starting point for my observations on monetary 
policy I referred to the fact that our considerable export trade 
brought in a large quantity of foreign exchange which the central 
bank converted into German currency, thereby inevitably in- 
creasing the note circulation. Export is essential for a Germany 
short of raw materials and foodstuffs. But the conversion of the 
export surplus into German currency which unleashes inflation, as 
well as overheating an already booming economy, should not be 
allowed. Instead such surpluses ought to be used to rebuild Ger- 
many’s foreign investments in order to secure the supply of raw 
materials, and ensure future orders for German goods. In addition 
to the surplus of foreign exchange, I singled out excessive govern- 
ment expenditure as a second cause of inflation. 

I could quote this lecture almost in its entirety, so relevant are its 
conclusions to the present-day situation. Then the danger of an 
imported inflation, caused by the excessive conversion of foreign 
exchange into Deutschmarks, was greater than one caused by 
domestic factors. For this reason I urged that ‘where measures to 
encourage investment and credit grants are concerned, the emphasis 
should, within the bounds of the existing surplus of foreign exchange, 
be transferred from the home economy to building up assets abroad’. 
I also recommended that debts incurred abroad should be repaid in 
advance of their due dates. 




In April of the following year I made another speech, also in 
Essen, and this time before the association of wholesalers and export 
traders. The subject was the politics of the capital market. Formerly, 
the market in fixed-interest bearing securities had been a constant 
prop for industrial financing. This market was fostered not only by 
the institutions, but also by the small saver. I criticised the fact that 
now it was just the institutions with large amounts of capital at their 
disposal (social and other insurances) who deposited their funds in 
the banks instead of investing in bonds or debentures or other 
securities, thereby contributing to the erosion of the security 
market. Long-term loans for investment were replaced by short- 
and medium-term bank credits. Regarding the pressure of im- 
ported inflation, I pointed out that the basic problem, which was 
either not recognised or ignored, was that foreign currencies 
could be utilised only abroad, and not in the domestic economy. 

At the beginning of 1959 an event took place which was to have a 
fatal effect on the progress of the imported inflation. The countries 
xr\Q$t concerned in world trade agreed amongst themselves to make 
therc^urrendes mutually convertible without any restrictions. 
The German economy welcomed this development. After all, 
since the bank crash of 193 1 the traffic in foreign exchangehad always 
been hedged about with government restrictions. Now at last 
German Marks could be exchanged at will into each and every 
foreign currency. International credit and capital traffic was now 
freed from all obstacles. It was only later that the hidden disadvan- 
tage of this agreement became apparent. It consisted in the fact that 
the exchange of currencies had to take place at the rigidly-fixed rates 
of exchange laid down by the International Monetary Fund in 1944. 
While everyone was overjoyed at the possibility of acquiring with 
German money any quantity of foreign exchange they wanted, 
everyone overlooked the fact that by the same token any quantity 
of German Marks could be acquired with foreign exchange. Export 
proceeds, foreign credits and capital investments flowed to Germany 
in large amounts as a result of the German boom. Their conversion 
into German Marks effected an increase in the quantity of money 



in circulation which the Bundesbank was no longer in a position 
to regulate. 

In a lecture on European policy in the light of market conditions 
delivered in 1958 I said that ‘permanently productive investments 
for Germany’s foreign exchange surplus must be found’. The only 
correct solution was to invest foreign exchange surpluses to good 
effect in the place where they originated - in other words abroad. 
In October, i960 I delivered another lecture in Stuttgart, and under 
the title ‘An End to Inflation’ I once more summarised all the 
arguments against the third inflation, which had by then broken 
out. In order to make quite sure that my expositions were right 
I asked my neighbour in Munich, the grand old man of economics, 
Adolf Weber, to cast his eye over my manuscript. He read it, 
and returned the draft of the lecture to me with the words ‘I 
subscribe to every word’. 

Why do I mention these lectures? Because I wish to recall the fact 
that the signals pointing to the impending inflation were clearly 
there, to be recognised by all experts. 

There has been much discussion about die extent of the third 
inflation. Everyone has appealed to some different set of statistics 
about price changes. Unfortunately price indices are compiled 
according to very different basic assumptions which can be inter- 
preted differently. In public discussions commentators sought 
to show that the value of money was falling by from two to five 
per cent each year, the difference in percentages being accounted for 
by the differences in political oudook. But there was general 
agreement that an inflation was in progress, irrespective of whether 
the devaluation of the Mark in the course of the last decade and a 
half amounted to 20 or 30 or 40 per cent. No move was made from 
the official side. Neither in public statements nor in the responsible 
government circles was there any sort of discussion of my state- 
ments, and no one made any attempt to prove them wrong. Neither 
Erhardt, the Minister of Economic Affairs (although when he wrote 
to congratulate me on my 85th birthday in January, 1962, he 
even went so far as to mention my expert knowledge in the 



field of finance) nor die President of die Bundesbank, Blessing, 
who had been schooled in the Reichsbank at the time of my 
presidency, deemed it necessary to concern themselves with my 

Had the increase in the volume of money been restricted to 
domestic inflation, it would certainly not have reached a level 
sufficient to cause public concern. But after i960 the imported 
inflation became serious, and made itself felt everywhere. The 
central bank's reserves of gold and foreign exchange grew month by 
month to quite unusual figures. The general price level and 
particularly the cost of living rose steadily and alarmingly. 

Since inflationary signs had begun to appear in odier countries 
too - everywhere a shortage of capital savings was leading wrongly 
to the creation of money through bank credits - the world of the 
international experts began to concentrate on the problem of 
inflation. At a conference of the International Monetary Fund which 
took place in Tokyomthe autumn of 1964 the British and American 
Finance Ministers expressed the view that the difficulties of re- 
building world trade could only be tackled by means of a systematic, 
slo\V, but gradually-progrcssive inflation. This attitude prompted 
me to abandon my reserve. 

Two ways were open to me: I could either make another direct 
approach to the personalities interested in and responsible for 
financial policy, or I could make another but more spectacular 
approach to die general public. To avoid possible reproaches 
I chose the first way. I prepared a memorandum suggesting how 
the inflation threatening from many quarters might be countered, 
and submitted it to a friend who as an industrialist played a leading 
role in the life of the German economy. His reaction was positive. 
He agreed to my request that my suggestion be passed on to the 
competent authorities. The Minister of Finance, Dahlgrun, ex- 
pressed his interest, Chancellor Erhardt wished to see this expert 
report by a top banker. Five months went by, and I heard nothing. 
Nor was anything done. I was forced to remind myself of the old 
adage ‘he who does nothing makes no mistakes apart from doing 



I therefore decided to try the other way. After my earlier experi- 
ences, particularly those in Stuttgart, I knew I had to express 
myself in a manner which could not be ignored or suppressed. This 
led to my writing an article which treated the theme in common 
parlance. The article appeared in November, 1964 in the Munich 
illustrated magazine Quick . It was not long before the reaction, 
alarmed and perplexed, set in. The response was amusing, and yet 
at the same time shaming. But at all events my serious aim had been 
achieved - the battle against inflation moved into the centre of the 
political arena. Now I was to be the victim of ignorance and political 
narrow-mindedness. The Suddeutschc Zeitung took the view that I 
should be altogether debarred from expressing views on questions 
of monetary policy. The editor of the Zeitschrift Fur Das Gesamte 
Kreditwesen, Muthesius, alleged that during the period in which 
I had been President of the Reichsbank the gold reserves vanished, 
and an economy subject to exchange-control was introduced. This 
expert did not know that during my presidency the Reichsbank’s 
gold reserves rose considerably, and that the coffers were emptied 
during the presidency of my successor, Luther. He was equally 
ignorant of the fact that exchange-control was introduced by this 
same Luther in the course of the second half of 193 1 when I was no 
longer President. 

As against these attacks, there was no gainsaying the fact that the 
million-odd readership of Quick expressed its lively agreement with 
my article, and the report of the commission of experts instructed 
by the government and parliament to examine the whole develop- 
ment of the economy which was published in 1965, made dis- 
cussion of the prevailing inflation its central theme. The govern- 
ment’s reply to this report was very feeble. And a rebuttal of my 
statements did not appear. The government spokesman who 
suggested that I was no expert on questions of currency did not 
know that three years earlier Chancellor Erhardt, who was then his 
boss as Minister for Economic Affairs, gave me credit for the 
opposite. The Socialist deputy, Wehner, of whom I will charitably 
assume that he never knew anything about MEFO bills, spoke 
scornfully about MEFO bill-juggling. 



It was noticeable that amongst those who denied that there was 
inflation was Karl Blessing, President of the Deutsche Bundesbank, 
In a speech delivered in the Berlin Stock Exchange on 22 January, 
1965, he explained ‘Anyone who speaks of a third inflation is 
guilty of sheer alarmism. The slight price rises over the last ten 
years have nothing in common with an inflation of the type we 
had because of the two world wars’. 

Now I never maintained that anything was of the same type as 
the inflations of the two world wars. This was something Blessing 
had added and something unfortunately not in the spirit of the 
injunction to remain intellectually honest made in the same lecture. 

The remark which linked the two world war inflations shows 
that Blessing was not clear about the variegated character of in- 
flations. He bracketed those of 1923 and 1939 together. But - I 
repeat - they had quite different causes. The inflation of 1923 came 
like an unasked-for thunderbolt, and for a long time it was not 
even properly identified. The second inflation came about in 1939 
as a deliberate political act aimed at furthering the war preparations 
which could not be Executed by normal means alone. The third 
inflation - in the mimt of which Germany finds itself today - was, 
it is true, not deliberately brought about, but it was recognised in 
good time. It was accentuated by the enormous quantities of foreign 
exchange converted into Deutschmarks as a result of the obligations 
entered into under Germany’s agreements with foreign countries. 
The three inflations thus had quite different causes. 

The obligation to convert foreign into home currency without 
limit contains a great danger for the central currency bank if it 
takes place at fixed rates of exchange. This obligation also precludes 
the enforcement of certain ‘basic’ laws. Paragraph 3 of the German 
law relating to die Bundesbank - and this currency law must after 
all be included amongst the basic laws - lays down that the German 
Bundesbank must regulate the circulation of money. The stability 
of a currency cannot be maintained if the central currency bank is 
not in a position to regulate, i.e. determine, the quantity of money 
in circulation. The importance attached to this point by the law- 
givers is shown by the fact that in a supplement to the Bundesbank 



law issued in 1957 the minimum reserve of the banks was put into 
the hands of the central currency bank with the newly-formulated 
and expressly-stated basis that it should be used to regulate the 
quantity of money in circulation. 

The decisions of the International Monetary Fund, to which the 
Bundesbank, as all other members, is subject, made it impossible 
for the Bundesbank to determine the quantity of money in circula- 
tion. An unrestricted influx of foreign exchange which must 
perforce be converted into German Marks influences the quantity 
of money in circulation in Germany in a manner outside the 
Bundesbank’s control. Objections to such an impediment to the 
enforcement of a German law were really necessary and would have 
been morally justified. The Bundesbank did not object. A dis- 
cussion of this state of affairs in the German press would soon, by 
agreement with the partners to the decision, have led to a prevention 
of the damage which Germany was forced to suffer. Public dis- 
cussion of the issues would have strengthened the Bundesbank’s 
hand, and in the meantime it would have been possible to 
carry on independent unilateral trade. In my Quick article and 
in several subsequent articles I made reference to such an interim 

If Blessing denies the existence of the present-day inflation or 
minimises it, and if the basic difference between the first and second 
inflation remains a closed book to him, then we can only conclude 
that a proper idea of what inflation is has eluded him. I am sup- 
ported in this conclusion by the following facts: on 7 January, 
1939, the directorate of the Reichsbank addressed a memorandum to 
Hitler, signed by all eight members including Blessing. It inti- 
mated that the Reichsbank would refuse to finance the Reich’s 
expenditure on re-armament. The result was that I, together with 
vice-president Dreyse and Reich budget commissioner Hiilse, was 
dismissed from office with immediate effect. On the very same day 
Hitler issued the order which obliged the Reichsbank to grant the 
Reich such amounts of credit as Hitler might at any time dictate* 
Thereupon our colleagues, the Privy Councillor, Vocke, Blessing and 
Erhardt, also tendered their resignation, which was accepted. They 



too did not want to be responsible for the inflation. In order to 
avoid attracting attention, the decree was not published until June, 
1939. At the same time the Reichsbank formed a managerial 
committee to assist the directorate. This committee continued to 
operate until the end of the war and carried out the measures which 
led to the inflation. Blessing joined the committee in June, 1939. 
He thus assisted in bringing about the inflation for six years until the 
end of the war. 

Germany had had an influx of foreign exchange once before, when 
between 1924. and 1930 loans to a value of some twenty milliards 
were taken up abroad. The extent and the futility of my efforts 
to stem this excessive inflow of foreign exchange and its consequences 
(the bank crash of 193 1, and the inability to meet foreign debts) 
have already been described. Here I only want to establish tliat the 
Bundesbank not only knejjof these events, but must also have had 
them very much in the Jprefront of its mind. If nevertheless the 
Bundesbank raised no objections to the flood of foreign exchange 
which took place between 1956 and 1964, this can be explained by 
the fact that the Bundesbank always found itself on the horns of a 
dilemma. It was obliged to change all foreign currency into German 
Marks. It could do nothing to prevent the receipt of export pro- 
ceeds. But in addition to export proceeds, foreign credits and capital 
investment also came into the country, and the bank felt itself 
obliged to stand by and watch without offering resistance. It could 
combat domestic inflation with a high rate of discount and by 
granting credit charily at a high rate of interest. But high rates of 
interest and credit scarcity attracted even more foreign money. 
So it continued to provide cheap and ample credit, thereby 
fostering domestic inflation without stemming the imported 

This development was made worse by the fact that the currencies 
of some of Germany's neighbours (French Francs and Italian Lire) 
were undergoing an even greater degree of inflation than the German 
Mark. As a result of the erroneous financial measures of excessive 
state expenditure and over-generous credit policies these currencies 



suffered a greater fall in purchasing power than the Mark. Thus, in 
1963, Germany’s neighbours began to pour their weak currencies 
into this country, in order to buy in Germany, with the stronger pur- 
chasing power of the Mark obtained at fixed rates of exchange. 
True, this contributed to the expansion of German exports, but at 
the same time it was also responsible for an inflationary increase in 
the circulation of money. 

Now it is not true that the Bundesbank did not attempt to contain 
the inflation. But the means employed were aimed at the symptoms, 
not the cause. The Bundesbank itself bought a large proportion 
of the foreign exchange on offer, retaining a part as credit balances 
abroad, particularly in the United States, and converting the remain- 
der into gold. Its reserves of gold and foreign exchange soon ex- 
ceeded its note circulation. To effect these purchases the central bank 
not only needed the bank-note presses but also forced into service 
the other banks, by employing the so-called minimum reserve which 
the banks had Co deposit with the Bundesbank. 

The institution of die minimum reserve appears for die first time 
in central banking policy in the Tree Banking Act passed by the 
state of New York in 1838. According to this act the banks must 
retain a percentage of the bank-notes issued by them as well as of 
the amounts deposited with them as reserves. The minimum 
reserve thus owes its origin to the need to safeguard the client. It 
was never intended to be a means of regulating the circulation of 

In the history of German currency, too, the minimum reserve 
had no part to play until the banking law of 1934. Naturally the 
Reichsbank expected that each client who enjoyed the privilege 
of having a transfer account with it - and that in itself was always 
a business recommendation - would maintain a credit balance on his 
account with the bank. But the reason was more a question of 
covering costs than one of general monetary policy. No rules 
about the actual level of the required credit balance were laid down. 
On the contrary, when in 1924 I joined the management of the 
Reichsbank. one of the first measures was the Lifting of exactly this 
customary obligation to maintain a credit balance. It was not until 



the banking law of 1934, which was passed as an aftermath of the 
bank crash of July, 1931, that the banks were obliged to maintain 
a cash reserve. And even then it was intended only as a safeguard 
against losses, and thus conceived in terms of ability to pay. 

In addition one must keep in mind under which political cir- 
cumstances this law, to which I myself was one of the signatories, 
came into being. National Socialist agitation under the leadership 
of Gottfried Feder was directed in great fury against private banking 
and against the entire currency system. Nationalisation of the banks, 
liberation from the bondage of interest, the introduction of a state 
‘Feder’ giro money, these were the catch phrases by which an end 
was to be made to our monetary and banking economy. I had to 
try to steer Hitler away from these destructive conceptions. I 
summoned the board which drafted proposals for the stiffer super- 
vision and control of the banks. The stipulation of the cash reserve was 
one of these proposals. The cash reserve makes sense as a means of 
securing the bank’s obligations where its banknotes and investments 
are concerned. As a means of maintaining liquidity it is by and 
large superfluous. There are other short-term assets capable of 
serving this end. The only real reserve of liquidity is the central 
bank with its banknote printing presses. Whether it pays out this 
cash reserve to a client in need of financial assistance, or whether it 
grants a subsidiary crecflWgStnst assets as security, payment is made 
through the banknote printing presses. If, today, there is a fifteen 
milliard credit balance with the Bundesbank which belongs to the 
banks, then the sixty-four thousand dollar question is how it will 
ever be restituted. 

The cash reserve was part of the Reich law on credit transactions 
passed on 3 December, 1934. Paragraph 16 of the law provided 
‘The credit institutions will retain a cash reserve which will be 
composed of cash in hand as well as the balance with the Reichsbank 
and the German postal cheque offices. The cash reserve must amount 
to at least a hundredth part as determined by the supervisory office 
of the obligations under Paragraph 11, sections I A, C, D, E, F (money 
on deposit, customer’s current account credit balances, debit 
balance of nostro account, acceptance of drawn up bills of exchange. 



and issue of the bank’s own bills and drawn up bills insofar as these 
are still in circulation). 

This wording clearly shows that the justification and purpose of 
the minimum reserve originated in the need for liquidity. It was in- 
tended as a genuine store of liquidity, and should not, as is happening 
today, remain blocked for years on end. It was also designed to 
bring all banks into dose contact with the Reichsbank in order to 
facilitate the latter’s command over the money market. The same 
considerations also guided the Federal committee for money and 
credit in 1953. Adolf Weber was asked to make a report by the 
plaintiffin my denazification process before the Ludwigsburg court. 
In this report he showed how I succeeded in bringing Hider to his 
senses where questions of banking and currency were concerned. 
At the end of March, 1933 Hitler declared in the Reichstag ‘In 
principle, the German government will safeguard the interests of 
the German people, not by means of a state-organised bureaucracy, 
but by means of the greatest possible furtherance of private enter- 
prise and respect for private property’. And a litde later he said to 
his party leaders ‘It is wrong to get rid of a good economist provided 
he is a good economist because he is not yet a National Socialist, at 
least not if the National Socialist who is to take his place knows 
nothing about economics’. 

Adolf Weber added that these expositions are in part almost word 
for word identical with the Fundamentals of German economic 
policy which I had published in the previous year. The passage in 
the work to which he refers reads ‘In answer to the contention that 
economic enterprises should be managed by a bureaucracy, which 
is always justified by the need to achieve a just distribution of econo- 
mic surpluses in pursuit of the common welfare, it must be stated as a 
first principle that the success of the economy depends in the first 
instance on the personal abilities of the individual engaged in economic 
activity. This applies equally to employer and employee. Only if the 
will to work and diligence of the individual is encouraged and kept 
alive can one reckon on the greatest possible success of the economy, 
with any success whatever. On the other hand that which is today 
generally and wrongly designated as socialism, and which is in 



reality an irresponsible politico-economic bureaucratism not 
directly interested in success, must disappear from the scene if the 
economic success necessary before there can be any distribution is 
to be achieved at ail’. , 

It was not until 1957 that the cash reserve was expressly used 
as a means of combating the threat of inflation. Paragraph 16 
of the Bundesbank law of 26 July, 1957 reads ‘In order to influence 
the circulation of money and the granting of credit the German 
Bundesbank may ask the credit institutes to deposit with it in the 
form of a transfer account one hundredth part of its obligations on 
current account (minimum reserve) cash deposits, short term 
investments and savings, as well as short and medium term moneys 
raised, excepting obligations towards other credit institutes obliged 
to deposit minimum reserves’. 

Here, then, the use of the minimum reserve as an instrument of 
monetary policy is anticipated. In the preamble to the law the 
minimum reserve is treated as yet another instrument for manipulat- 
ing the quantity of money in circulation. Even if the minimum 
reserve is used to reduce the quantity of money in circulation the 
experiences of the last few years show that it does not suffice to 
prevent an inflation. As a result the disadvantages of the minimum 
reserve have become evej^norc apparent. It deprives the German 
banks of fifteen milliaOTDM which yield no productive results and 
show no profit. This missing profit must thus be made up by the 
banks by making their remaining sendees and business transactions 
more expensive. Drawing on the minimum reserve in a case where 
a single firm finds itself in difficulties is scarcely possible, because it 
cannot take place automatically but requires a request addressed to 
the Bundesbank - a procedure which would undoubtedly attract 
undesirable attention. 

As a tool employed in monetary policy the minimum reserve is a 
primitive and not very ingenious instrument. Why the Bundesbank 
consciously and obviously used it to achieve a questionable success 
in combating inflation is not easy to understand. The fact that it is 
used in America should not make it a precedent to be imitated. 
‘The determination .of the reserves of the commercial banks is 



amongst the instruments employed by the central bank when it 
seeks to compensate for excessive liquidity by amassing gold and 
foreign exchange,’ says Veit in his standard work on monetary policy. 
He adds immediately ‘Whether such sterilisation is a failure or a 
success is one of the big questions of the monetary policies of our 

Regulation of the quantity of money in circulation is the foremost 
task of the central bank. Paragraph 3 of the Bundesbank law says 
‘The German Bundesbank, aided by the currency policy facilities 
provided by this law, is to regulate the circulation of money and the 
granting of credit to the economy with the aim of safeguarding the 
currency, and is to provide for the settlement of payments at home 
and abroad’. 

If the central bank is prevented by outside influences from regu- 
lating the quantity of money in circulation, then the task entrusted 
to it has no meaning. Such a state of affairs actually occurred in 
recent history. When in 1923 the Reichsbank, in view T of the 
colossal inflation, was no longer able to print a sufficient number 
of the coloured paper notes, it allowed the municipalities and a 
whole series of industrial undertakings to print for themselves the 
notes required for their monetary needs. It undertook to accept 
this so-called emergency money at the same value as the Reichsmark. 
A greater enormity is hardly imaginable. In any case, the result was 
that the regulation of the quantity of money in circulation slipped 
completely out of the Reichsbank’s hands. The central bank law 
was to all intents and purposes put out of action. 

It is regrettable that the Bundesbank did not remember these 
events when the introduction of convertibility at fixed rates of ex- 
change threatened to place it in a similar position. Should I find my- 
self subject to a contract which makes it impossible for me to carry 
out the terms of a basic German law, then my first step must ob- 
viously be to draw the attention of my partner in the contract to this 
fact and to ask for an amendment or supplementary clause to the 
contract. Nothing of the kind took place. 

The government too resorted to a remedy by means of which it 



sought to influence the imported inflation. This remedy did not 
originate with the Bundesbank which, I am glad to say, disagreed 
with it. The scientific adviser to the Federal Ministry of Economic 
Affairs stated in a report that the best way to damp down the over- 
heated export market conditions and the imported inflation linked 
with it was to alter the value of the German Mark. The Deutsch- 
mark should be revalued. Accordingly in March, 1961 the Mark was 
revalued by five per cent. Experience has shown that the revalua- 
tion did not affect the export imbalance and did not alleviate the 
imported inflation. The remedy of revaluation proved ineffective. 
It was also basically wrong. 

It must be clearly understood that the national economy of a 
country which takes part in world trade is linked with its clients 
abroad by a great number of contracts covering delivery, orders 
and other commercial agreements. A large proportion of these 
agreements is concluded in terms of the home currency, and thus in 
the case of Germany, in German currency. If one now legally 
changes this currency, then all contracts with countries abroad are 
affected. A purchaser who ordered a machine plant in Germany 
in February, 1966 and expected to pay a price of one million DM 
in dollars, had by March to find an extra five per cent in dollars 
because of the revaluation of the Mark. Such a procedure could 
only be regarded as a deliberate fraud. Another remedy which the 
government employed, this time with the accord of the Bundesbank, 
is no more commendable morally. The interest coupons of German 
securities in the hands of foreigners were, by a law passed on 28 
June, 1965 encumbered with a twenty-five per cent coupon tax. 
A foreigner who bought on the market a government security 
yielding six per cent now obtains ®ur and a half per cent interest 
instead of six per cent. It is inevyble that he should feel himself 
cheated by such a procedure. 

Moral behaviour is just as essential in business and commerce as 
it is in politics. Insolvency is encountered often enough, but 
reproaches for such a state of aflairs are justified only where it has 
been deliberately brought about. In my denazification process in 
Ludwigsburg, the disappointment of American subscribers to 



German loans was naturally also mentioned, because the payments 
due on these loans were suspended during my term of office with the 
Reichsbank. But when the American expert Professor Palyi was 
asked whether any blame attached to me in this regard he answered 
‘by no means’. 



Twice Germany has experienced an end to inflation. Both times 
it was accompanied by a transformation in fortunes and financial 
assets which hit all classes of society but bore hardest on the less 
well endowed. Both times vain attempts were made to make at 
least partial amends for the injustices of inflation. After 1924 all 
mortgage and similar claims were up-valued by a large percentage. 
I then argued that the degree of the upward valuation should be 
determined by social considerations, not by strictly legalistic ones. 
I was of the opinion that the less-well-off should be given more 
consideration than the well-to-do who were not so badly affected 
by the fall in values. Government and parliament did not share my 
views. All were treated equally in strict accordance with the legal 
character of their claims. 

After 1945 some compensation warranted under the Equalisation 
of Burdens Act, once again withoujpnaking the social circumstances 
the determining factor. As today we are coming to the end of the 
third inflation, it must be noted that so far this inflation has not 
brought about a transformation in fortunes and financial assets to 
a degree where compensation for those affected has become essential. 
When the inflation has been brought to an end everyone will have 
to be content with the fact that it has not gone further. It is im- 
possible to bring the Mark back to its former purchasing power. The 
only remaining hope is that the authorities will pursue a taxation 
policy which affects those who gained from the inflation more than 
those who lost as a result. 



In general, experience has confirmed the rule that an arbitrary 
upward valuation of a currency has just as little lasting effect on 
the purchasing power of money as a devaluation. The idea that 
fluctuating changes in currency can be used as an instrument of 
economic policy is erroneous. The basic assumption behind every 
economic policy, particularly where international trade is concerned, 
is stable currency which enables everyone to plan ahead beyond 
the immediate moment. The recommendations aimed at alleviating 
the inflation which originated in mistaken domestic policies are 
legion. They can, however, be concentrated into two basic rules: 
public expenditure must not be financed by means of the money- 
printing presses, and short-term bank funds must not be used for 
long-term investments. All long-term investments must be financed 
by the capital market, that is, out of savings. All public expenditure 
must be defrayed out of taxes or loans. 

In recent decades die German authorities have grievously offended 
against these basic rules. To a large extent public expenditure has 
been financed by printing more notes. And the loan banks have 
sanctioned far too great a volume of investment with short-term 
money, thereby injuring their liquidity. A look into the Deutsche 
Bundesbank’s balance sheet for 1964 gives us an illustration of this. 
Amongst the bank’s assets we find (in round figures) : 

loans to the Federal Government for foreign interests 3 Milliard DM 
other claims on the Federal Government 3 Milliard DM 

World Bank and International Monetary Fund 2 Milliard DM 

These assets to a value of 8 milliard are illiquid. Should Germany 
be overtaken by a general crisis they would be inaccessible. The 
central bank is in no position to help in such an instance, because 
it cannot render these interests, investments and government credits 
liquid. Two other kinds of assets would also be unrealisable in these 


foreign exchange 

17 Milliards 
11 Milliards 

1 62 


Both items could not be converted into German Marks, should the 
German economy find itself overtaken by a financial crisis, because 
in such a case no German would have the money to buy gold and 
foreign exchange and no foreigner can pay with German Marks, 
but only with foreign exchange. If we look at the other side of the 
Bundesbank balance sheet we find the assets balanced by the follow- 
ing liabilities: 

obligations towards banks 

(minimum reserve) 15 Milliard DM 

obligations towards others ' 3 Milliard DM 

note circulation 27 Milliard DM 

Thus obligations to a value of 45 milliards are balanced by 36 
milliards in illiquid assets (the equalisation claims against the public 
sector are not taken into account here, they are also illiquid, but 
arose unavoidably out of the currency operations undertaken in 

The question which must be asked is by what means the Bundes- 
bank would pay out their credit balances to the banks should this 
prove necessary? The only way would be to resort to the note- 
printing presses, and thus further inflation. Yet another question 
is even more to the point: by what means did the Bundesbank 
pay for the 17 milliards of gold and the n milliards of foreign 
exchange? Having made 8 milliards over to the Federal govern- 
ment on long-term loan, and having purchased gold and foreign 
exchange to a value of 28 milliards, making an outlay of 36 milliards, 
one can only conclude that a large part of the deposits by the banks 
for their minimum reserves obligation were employed for the 
purchase of gold and foreign exchange. The Bundesbank has put 
the credit balances belonging to its banking clients into unmarketable 
illiquid assets (unsaleable gold and foreign exchange). However, 
this has not stopped the Bundesbank from calling this credit balance 
belonging to the banks a reserve. But surely a reserve means 
that these credit balances should be immediately accessible in 
c ase of a crisis. 



This rather rough calculation, which leaves out of con- 
sideration a number of smaller items, serves to make one thing 
clear: hoarding gold and foreign exchange is not a good 
preparation for the contingency of an internal financial crisis in 
Germany. ? , 

Most attempts to deny that we are today in the middle of an 
inflation appeal for justification to the various price indices. It is 
pointed out that large price fluctuations have from time to time 
also taken place at times when there was no inflation. Reference 
is made to the fact that improvements in the general standard of 
living are associated with .general rises in the price level. This 
however only proves that price-rises on their own need not be an 
indication of inflation. If there is a quantitative or qualitative rise 
in the consumption of goods - and this is what a rise in the standard 
of living means - then prices rise too. More valuable raw materials 
are used, more working hours are employed in the manufacture of a 
commodity. Both are a natural cause of a rise in costs, and thus also 
effect higher prices. 

This kind of attempt to prove the non-existence of inflation 
ignores the basic character of a monetary economy. Money is a 
means of exchange, money moves commodities, money enables 
consumer goods to change hands. All other qualities of money 
are secondary. Therefore the relation of the quantity of money to 
the quantity of goods, which superficial critics take pleasure in 
deriding as naive, has a key significance. 

In its annual report for 1927 the Reichsbank formulated these 
principles admirably : ‘A great increase in the circulation of die means 
of payment, even if fully covered by gold, must have a deleterious 
effect on price-formation. This effect gives the appearance of being 
graver than it is, since price rises, even if they have quite natural 
causes from the goods side and in production costs, are, as experi- 
ence shows, interpreted as signs of inflation by large sections of the 
population. The cover principle must not and cannot therefore 
serve as the sole criterion for the Reichsbank, because otherwise 
the economy, would by the roundabout route of price- and wage- 
rises arrive at false conceptions of profitability and be misled into 



wrong use of investment and business activity. The circulation 
of the means of payment of a country must be maintained in a 
balanced relationship with the level of economic activity. It can 
without detriment be higher in times of lively economic activity 
than in quiet times/ 

In xny doctorate thesis of 1900 in which I discussed the English 
mercantilists, I had established that these authors already knew how 
to distinguish precisely between price-rises due to normal economic 
development, and price-rises due to an excessive quantity of money. 
John Hales (1549) nominates c the plenitude of money which in our 
time flows into our country to a far greater extent than our fore- 
fathers ever experienced’ as a cause of price-rises additional to the 
usual factors. At this time money consisted of precious metals, 
and experienced an enormous increase in volume as a result of the 
booty of silver and gold obtained from the Americas. Other writers 
treated in my thesis represent the view that a definite relationship 
between the quantity of money and the turnover of goods must be 
maintained. It was recognised That the demand for money is 
determined by the maximum amount of periodically-recurring 

Thomas Mun (1630) expressed the fear that the quantity of money, 
circulating in a country might grow to such an extent, and bring 
about such a rise in the price of all goods, that exports would suffer. 
The conceptions of the English Mercantilists thus clearly signify 
that an increase in the quantity of money effects a rise in all prices. 
The dangers of inflation were already recognised four hundred years 

It is the task of the central bank to make as much money available 
as is needed for the exchange of goods. For this reason all laws and 
acts relating to the central currency bank have made the com- 
mercial bill the fundamental element of central bank policies. 
The commercial bill indicates the turnover, the part-completed 
exchange of a commodity'. If the central bank grants credit 
against a commercial bill there is no danger of unleashing in- 
flation. All other types of credit require most careful examination 
and consideration. 



People have often wondered why the large credit operation of the 
’thirties did not unleash inflation. Superficial and malevolent critics 
were always on the look out for the ‘trick 7 behind it all. But the 
secret of the MEFO operation consisted simply and solely in the 
observance of the basic principle of monetary policy. Credit was 
granted against bills of exchange, the MEFO bills, which meant 
that each issue of money was based on a commodity transaction. 
Money was not issued for each and every expenditure, but 
only if the amount of money was equivalent to an amount of 
goods which was vouched for and transferred by means of the 
bill. The assets of the Reichsbank consisted of commercial bills 
and of nothing else. Other assets, bank bills or credits played 
no part. 

And now to look again at the balance sheet of die Bundesbank. 
17 milliards in gold and 8 milliards in claims against the public 
sector do not reflect a turnover of goods. They contradict the 
fundamental character of money. They are inflationary. Nor can 
price indices do anything to change this state of affairs. 

Official spokesmen always refer with great satisfaction to the growth 
in the amounts saved by the population of Germany. These savings 
are certainly gratifying, even if their expressions in inflated figures 
always belies their actual value. Less gratifying is the way in which 
diese savings are invested. In times of peace such savings capital 
was largely invested in debentures issued by die public sector and by 
industry. Today such savings are largely gathered into the great 
money institutions, the Giro accounts, banks, insurances, etc. People 
have no faith in the long-term investment of money. The cause 
for this lack of faith must be sought firstly and principally in the 
constant inflationary reduction in the value of money. 

The Bundesbank’s policy of cheap credit, adhered to throughout 
the boom period, has contributed to the bad state of the money 

A country which after war and inflation had been brought 
to an unprecedented state of poverty, needed high interest rates in 
order to encourage saving. Already twice since the collapse of 1945 


1 66 

the attempt to maintain the low rates of interest prevailing on the 
capital market has failed - in 1956 and in 1965. These mistaken 
attempts also account for the failure to check inflation. If a pro- 
portion of savings had at the right time been directed into long-term 
investment in securities, there would have been little or no need to 
put milliards into a minimum reserve. 

On this point too the Bundesbank could have found a precedent 
in its own history. When in 1939 signs of an impending inflation 
began to appear the Reichsbank adopted a drastic investment policy. 
In 1938 it issued no less than three Reich loans. They had the fol- 
lowing result: 

1st loan: original amount issued 1,000 million Marks. Due to heavy 
oversubscription increased to 1,200 million Marks, Subsequently a 
further 200 million were placed. 

2nd loan: original amount issued 1,000 million. Increased to 1,600 
million, owing to heavy oversubscription. Subsequently a further 
366 million were sold. 

3rd loan: original amount 1,500 million. Raised by 350 million. 

Thus in the course of one year a total amount of 5*2 milliard. 
Marks was taken off the market through Reich loans. In an essay 
entitled ‘The Financing of Rearmament in the Third Reich’ 
Dr Henry Stucbcl wrote the following about the 1938 loan policy: 
‘In issuing the loans the Reich was independent of the populace’s 
will to invest. It is true that a Reich loan consortium came into 
existence. Yet the large part of the loans was disposed of “without 
friction” and “in the normal course of events” i.e. monies which had 
been collected by the mutual loan societies, the savings banks, the 
insurance companies, the post office savings banks and the social 
insurance fund were skimmed off by the Reich and converted into 
the national debt’. 

This account is incorrect. The fact is that the entire amount of the 
first loan, j*2 milliards of the second loan and 1*25 milliards of the 
third loan were placed by the Reich loan consortium by public 
subscription. In addition to that publicly subscribed, 400 million 



Marks of the second and 550 million Marks of the third loan were 
firmly placed. All three loans were proclaimed publicly in all the 
important papers by means of prospectuses and invitations to 
subscribe. Stuebel’s account is a typical example of the way in 
which political prejudice can colour and distort the statement of the 
true facts and the verdict of history. Stuebel accompanies his 
account of ‘frictionless’ placing and ‘in the normal course of events’ 
with the sentence ‘thereby the majority of the German population - 
for the most part probably without realising it - became direct 
creditors of the Reich’. . 

Does Stuebel think that the mutual loan societies, savings banks, 
insurance companies and social insurance funds do not today also 
invest the monies collected by them in Government loans? Does 
Stuebel not believe that today too loans are placed without friction? 
Does Stuebel think that savers have only now come to the realisation 
that they become the state’s direct creditors should their credit 
institutions acquire Federal Loans? 

1 am only too pleased to concede that a parliamentary government 
has a harder time of it financially speaking than an authoritarian 
regime. But in our time too it should be possible for the government 
and the Bundesbank to manage things in such a way that the 
threat of internal inflationary policies can be countered by a 
revitalisation of the security market. Naturally in an impover- 
ished country this is possible only if higher rates of interest are 

Other means must be used to combat imported inflation. In the 
winter of 1964-65 I took some steps to stimulate this. In doing so 
I did not suggest anything which would injure the contractual 
obligations which Germany was bound to honour by international 
agreement. In particular I rejected the suggestion contained in the 
aforementioned report by five experts, that a flexible exchange rate 
should be adopted. This would have been an affront to Germany’s 
trading partners. Nor did I entertain the retrospective affront to 
foreign buyers of German securities, which was perpetrated by the 
coupon tax law. 

My proposal attacks the imported inflation on the German money 



and capital market, not on the foreign one. This proposal recom- 
mends that the foreign exchange on offer should indeed be changed 
into Deutschmarks but that their use at home should be blocked and 
only their re-use abroad should be sanctioned. Which of the foreign 
exchange receipts should be subject to these measures would be a 
matter for careful consideration. It would be necessary to grant 
substantial exemption to receipts from the export of goods. But 
foreign credits, and proceeds from the sale of internal investments, 
bonds, etc. to foreigners are a rich field for restrictions at home and 
reinvestment abroad. 

Two objections to my proposal were advanced. The first was 
that such a measure harked back to the different sorts of Mark 
of the ’thirties which still rankled in the memory. This objection 
is based on a misjudgement of the procedures of those days. The 
bank crash of 1931 had the moratorium on foreign payments, the 
deferment agreements and the economy subject to exchange control 
as its consequences. As a result Mark balances belonging to foreign 
creditors accumulated in the foreign exchange clearing office created 
for this purpose, balances which could not be transferred in foreign 

When I resumed my duties as president of the Reichsbank in 1933, 
I offered foreign creditors a variety of ways in which they could use 
their Mark balances should they wish to do so as a means of avoiding 
the unforeseeably long delay until the blocked Marks could be 
transferred. I exercised no kind of compulsion, but left it entirely 
to their free choice whether they wanted to wait for Mark transfers 
to become possible, or sell their Mark claims at a discount insofar 
as they could or would not utilise them within Germany. Many 
foreigners availed themselves of this alternative, particularly those 
who regarded an immediate transfer of Marks surer or preferable 
to a long wait or those who could undertake profitable ventures with 
money immediately available. . , . 

My current suggestion too does not exert any compulsion over the 
foreigner, indeed it leaves him completely untouched. The question 
is whether it exerts any compulsion over nationals of this country. 
Surely no more than today when his cash is blocked for year after 



year as part of the minimum reserve? No, the constraint imposed 
upon him by my suggestions is considerably smaller. For he can do 
nothing whatever with the money locked up in the minimum 
reserve, while he can put the ‘foreign Mark’ to use abroad. Yet the 
foreign Mark’ would do more to relieve the inflationary pressure 
than the present day minimum reserve. Fifteen milliard blocked 
external Marks would have a greater anti-inflationary effect than 
fifteen milliard blocked inland Marks. 

The second objection to my proposal is that a restriction on the 
use of the Mark contravenes the basic principle of die free market 
economy. Now the free market economy is something about which 
one should no longer make such a fuss, particularly if one remembers 
the many subsidies which the state grants to coondess branches of 
the economy, the many kinds of cartel which are allowed, the many 
privileges in business transactions, credit grants, exemptions, etc. 
which exist in the financial sphere. Our free market economy was 
not leakproof from the very beginning and it is now riddled with 
holes. And it is quite impossible to allow inflation to be offered up 
as a sacrifice on the altar of the imaginary god of the free market 

My first suggestion is of course intended for application only 
should the imported inflation, which at the time of writing has 
abated, recur. It will continue to be a threat so long as the un- 
restricted conversion of foreign exchange into Deutschmarks 
remains possible. No one thought of this threat when agreement 
about unlimited convertibility was reached with the International 
Monetary Fund. Yet i £ as it has subsequently turned out, this 
contractual obligation prevents the implementation of a basic 
German law, which is what the Bundesbank law is, then those at 
home and abroad must reconcile themselves to any German measure 
which can remedy this state of affairs without formally injuring the 

A further recommendation which I made concerned the utilisation 
of the Bundesbank’s foreign exchange reserves to finance the needs 
of foreign trade. The basic idea behind this recommendation is that 
the credits which the banks now grant to industry for the purchase 



of foreign raw materials should in future be granted by the central 

Let us assume that at present the German banks have given credits 
in respect of such raw materials to a value of 8 milliard DM and that 
they charge 7 or 8 per cent interest. At the same time the Bundesbank 
holds 10 or more milliards DM in dollars deposited with the Ameri- 
can banks, and obtains a rate of interest averaging two per cent at the 
most. The American banks use this money to promote the Ameri- 
can economy. Why does the Bundesbank not use its dollar assets 
to grant the eight milliards in credit required for the purchase of 
raw materials by German industry? In this way it could reduce the 
cost of credit to German industry by several per cent, relieve the 
German banks of the burden of such credit, and use the money thus 
set free to increase the liquidity of the German banks should this 
prove necessary. 

A third proposal dealt with the slowing down of state expenditure 
on so-called development aid. This will be dealt with in the 
thirteenth chapter. Both the foregoing proposals were only roughly 
sketched in by me. They require detailed working out and organic 
amplification. They can be adapted in many ways and have innumer- 
able applications. And they arc not the only possibilities ; they merely 
serve as examples. 

The future will provide us with many more challenges which will 
require us to co-operate in finding new solutions. However, an 
attack in the full glare of publicity must be launched against a 
currency policy giving itself over to the blandishments of inflation 
and bringing about a transitory economic flowering with over- 
consumption, luxury and dissipation, which cannot last forever 
because it is conducted not through saved capital, but by con- 
tinuously devaluing money. 

Inflation is not respectable as an instrument of currency policy. 
This was said as long ago as 1951 by the well-known Frankfurt 
banker and economist Albert Habn. He calls inflation a crime. In 
February, 1962, Dr Wesemaun said in a broadcast Tt is beyond 
question that from the social point of view an inflation is the worst 
crime of which a state may make itself culpable’. Professor Richard 


Gaettens concludes his book on inflation with the words ‘Inflations 
are the worst offences against one of the fundamental rights of man, 
against private property’. 

The first president of the Deutschen Bundesbank, the privy 
councillor, Vocke, summed up his deliberations as follows ‘It remains 
true that inflation, the unjustest and most anti-social of all pro- 
cedures, is basically self-deception and swindle’. 



I was prompted to look for the cause of the excitement of certain 
public men created by my warnings in the magazine article, and to 
investigate why people denied that I had any knowledge of cur- 
rency policy and any understanding of it at all. if even an expert 
critic like Muthesius, the editor of the Zeitschrift fur das gesamte 
Kreditusesen - who expressly referred to the fact that he had lived 
through the ’twenties and ’thirties, and had studied the policies 
pursued by the Reichsbank during this period - docs not know that 
the depletion of the Reichsbank’s gold funds and the introduction 
of exchange control occurred not in my period of office but in that 
of my successor, then one can safely assume that younger critics 
have even less idea what happened in the ’twenties and ’thirties 
in the field of monetary policy. I therefore asked one of the younger 
generation of economic journalists to paraphrase his views on this 
period. Here is the result. The question which the young generation 
wishes to put to the president of the Reichsbank is why he did not 
stop the completely incomprehensible short-term foreign indebted- 
ness which developed in the ’twenties by means in accord with free 
market principles, and why deficit expenditure was not restricted 
when in 1936 it became obvious that deflation was changing to price 
inflation, and full employment had been achieved. At this time the 
political significance attached to the office of president of the 
Reichsbank was still such that he could not easily be dismissed sum- 
marily, while the Reichsbank could not be robbed of its autonomy?’ 
To answer this question I must first summarise the policies which 
the Reichsbank pursued at this time. It must be mentioned at once 



that between 1924 and 1930 the Reichsbank had a general council 
with seven foreign members in addition to seven Germans. These 
were forced upon the Reichsbank by the Dawes plan. Thus all 
measures taken and all deeds performed by the Reichsbank were 
controlled from abroad. Each of the seven strangers represented a 
foreign country: the United States, England, France, Italy, Belgium, 
Holland and Switzerland. Quite naturally it was part of each mem- 
ber’s task to see to it that nothing was done which might injure 
the interests of his country. Now it is true, as I would unhesitatingly 
certify, that the foreign gentlemen all did their best to collaborate 
with the directorate of the Reichsbank in an objective way; but they 
had been seconded to the Reichsbank under political auspices, and 
were obliged to devote a good deal of their attention to seeing to it 
that the Dawes plan ran smoothly for as long as possible. 

To them too it was clear that it was not possible to defray the 
Dawes payments principally out of export surpluses so that they 
could be effected only by means of foreign credit. But they hoped 
for a favourable development in later years which would make up 
for the initial deficit. It says quite a lot that none of them raised any 
objection when the Reichsbank pointed out that export proceeds 
and reparations obligations were quite out of proportion. 

The Reichsbank did all it could to drum this lesson home, and 
also repeated it quite unambiguously in its annual reports. Its appeals 
were addressed not to the general public, but to the authorities of 
the Reich, the provinces, and the municipalities. Its annual reports 
were sent to foreign central banks and finance ministries. It also 
urged repeatedly that the German government in particular should 
extend the powers of the advisory office, suggesting that it should 
be given the right to veto any acceptance of foreign loans, and not 
merely restricted to an advisory capacity. All German governments 
of the ’twenties ignored these urgent promptings by the Reichsbank. 

It is surprising that the foreign members of the general council 
did not oppose or suppress the Reichsbank’s annual reports con- 
taining passages such as that from the annual report for 1926: 4 Where 
the foreign credits are concerned, the Reichsbank found it necessary 
during the period covered by this report just as in the previous year 



to warn very seriously against the regularity and extent to which 
foreign debts were being contracted and to do everything which 
could be done, without injuring legitimate German economic 
interests, to prevent an exaggerated and premature resort to foreign 
credit markets. Altogether during the year covered by this report 
German loans to a nominal value of nearly one and three quarter 
milliard Reichsmarks were raised abroad (as against some one and a 
quarter milliards in 192$). The share of public loans - for the 
‘Lander’ (Federal States) and municipalities as well as those enjoying 
state or municipal guarantees - took up some 600 million of this 

The Reichsbank added the following political warning to this 
cold statement of the facts of monetary policy ‘Quite apart from 
the grave consequences for monetary and economic policy, the 
excessive incurring of foreign debts also has an effect on repara- 
tions policy. Foreign exchange for transfers derived solely from 
foreign credits camiot be regarded as the proceeds of an economic 
surplus resulting from the industrial enterprise of our country, 
which the Dawes plan makes a pre-condition for effecting repara- 
tions payments’. 

The annual report for 1928 says inter alia ‘Despite such and 
similar measures designed to promote export, it was impossible in 
the face of the prevailing intransigent protectionism on the part of 
foreign countries to overcome the adverse German balance of trade, 
and to achieve the substantial increase in exports which is so essential 
from the point of view of reparations policy . . . once again in the 
course of the entire year reparations were paid, not out of surpluses 
earned by the economy, but by means of borrowed monies. 
And once again the question presents itself, how long can this 
process of incurring debt continue and to what extent can the Ger- 
man economy still be expected to carry on under the prevailing 
credit conditions, which have become progressively worse in the 
course of the year?’ 

The Dawes plan came into operation towards the end of 1924. 
As early as 1925, and then in every subsequent year, the Reichsbank 
warned in its official annual reports diat excessive foreign credit 



was dangerous. A further passage in the annual report for 1928 is 
still more explicit ‘Even more urgent and important is the need to 
establish whether this foreign indebtedness makes and will make a 
contribution to effecting a German export surplus sufficiendy large 
to make interest payments (already amounting to some one 
milliard Reichsmarks) on the foreign loans raised so far, as well as 
the annuity payments due on the Dawes plan possible ... To date, 
the transfer of the annuity payments due on the Dawes plan has 
been made possible only by the credits raised abroad. Since the 
four-year trial period is now over, it will be necessary to make a 
thorough investigation into the question whether, in view of the 
stipulations of the Dawes plan, whereby in the long run a transfer 
can be made only out of balance of payments surpluses, it is per- 
missible to continue making transfers with borrowed monies’. 

If, despite all this, the German governments still exhibited reluc- 
tance when faced with the question whether or not foreign credits 
should be vetoed, then the reason was the pressing desire not to 
prejudice the efforts made to free the Rhineland. The ending of the 
military occupation of the Rhineland was the great political aim to 
which all economic considerations were subordinated. The Reichs- 
bank too was unable to remain aloof from this political aim. In the 
spring of 1929 the Young committee began its deliberations in Paris. 
Freeing of the Rhineland depended on their result. It is true that 
Germany’s opponents were beginning to realise that power politics 
would not lead to financial success, but at this point in time Germany 
still had to accept the fact that the liberation of the Rhineland could 
not be achieved without financial sacrifices. The Young plan, 
as formulated by the experts, was signed. The Rhineland was freed. 

During these discussions the Reichsbank’s hands were even more 
tighdy tied by politics than before. This was just as true for the 
short-term foreign credits as for the long-term loans. But even had 
these decisive considerations not been in evidence, the Reichsbank 
would still have had to take an unusual attitude towards the short- 
term credits. Short-term credits in general are raised only for 
current deals, foreign credits in particular mainly to finance import 



and export trade. Short-term foreign debts are counter-balanced 
by short-term foreign claims. Short-term foreign credits become 
grave in their consequences only if they are used for home invest- 

When in the autumn of 1927 it emerged that a number of banks 
were using short-term foreign credits to finance stock exchange 
speculation, the Reichsbank intervened with great success. I have 
already mentioned ‘Black Friday*. 

Had the Reichsbank intervened in the granting of credit for 
foreign trade, it would have delivered a body blow to the German 
economy in just that area in which there was some hope of a 
solution to its problems - the field of exports. Germany had 
undertaken to do everything possible to promote its own exports. 
A restriction on credit for foreign trade would have been regarded 
as sabotage, and could conceivably have prevented a political 

With the New York stock exchange crash of October, 1929, the 
granting of long-term credits to Germany came to a sudden end. 
Short-term credits continued to be negotiated because they are a 
regular part of foreign trade, and quite indispensable. My departure 
from the office of Reichsbank president at the end of March, 1930, 
did nothing to alter this state of affairs, because foreign trade simply 
cannot do without such credits. I am unable to say from personal 
knowledge whether after my departure foreign credits were mis- 
used, or raised to an excessive extent. But after the banking crisis 
of July, 193 1 , an understanding was soon reached with the foreign 
banks whereby short-term credits were governed by the so-called 
standstill agreements. The Reichsbank report for 1932 tells us that 
‘The short-term indebtedness incurred by the banks and the rest 
of German economy with foreign banking creditors, insofar as 
these obligations come under the German credit agreement of 193 3 » 
still amount to some 4 milliard RM\ 

It was not the short-term foreign credits which made the situa- 
tion in the ’twenties so grave. No, the seriousness was in the volume 
of the long-term loans. Repayment of capital and interest on the 
short-term credits was taken into account when the terms of foreign 



business transactions were agreed. The transactions financed by 
such credits brought in foreign currency. The long-term loans, 
on the other hand, disappeared into thin air, their proceeds swallowed 
up in home investments or in reparation payments. 

The second question, why deficit expenditure was not restricted 
when in 1936 it became obvious that deflation was giving way to 
price inflation, and full employment had been achieved, betrays 
an erroneous conception of political realities which goes even 
beyond an inadequate knowledge of conditions in the ’twenties. 
If this question is based on the proposition that ‘at this time the 
political influence attached to the office of president of the Reichs- 
bank was still such that he could not easily be dismissed summarily 
while the Reichsbank could not be robbed of its autonomy’ then 
one must ask oneself what kind of historical knowledge is imparted 
to our young generation at the universities. Already, prior to 1936, 
Hitler had dismissed other august persons from their offices, and 
deprived organisations quite different from the Reichsbank of their 
autonomy. In the literature of the history of our time we are 
constantly told how totalitarian power was misused at that time, 
and here all of a sudden we are asked to believe that Hider would 
have called a halt when faced with the Reichsbank and its president! 

During my last visit to Chicago I was interviewed on a television 
programme. Referring to Hochhuth’s The Representative , the 
interviewer asked me what effect a protest by the Pope against the 
persecution of the Jews would have had on Hidcr. I replied ‘None 
whatsoever. The only reason why Hider did not dismiss me and 
deprive the Reichsbank of its autonomy earlier was because he still 
believed that he could persuade the directorate of the Reichsbank 
to his point of view. When he saw there was no hope of this 
happening, he did not hesitate for a moment.’ Nonetheless, the 
Reichsbank still took action to the extent to which it remained 
in its power to do so. It could not restrict the deficit expenditure, 
but it could demonstrate to Hitler that the income and savings of the 
German people did not suffice to carry out his wishes. If in 1938 
the Reichsbank invited the public to subscribe to a series of three loan 



issues to tailing milliards of Marks, and if one half of the last of 
these loans was left on the bank’s hands, then perhaps Hitler could 
be persuaded by this result to restrict his expenditure on arma- 
ments. This aim and intention lay behind the Reichsbank’ s loan 
procedure. The attempt failed. Hitler had chosen inflation and 
damn the consequences. 

It was a sheer miracle that the Reichsbank was able to preserve 
its independence for six years, and that it was able to pursue sensible 
monetary and currency policies under a brutal totalitarian regime. 
Even so, the Reichsbank would have been quite unable to restrain 
the deficit expenditure of a dictator. Let us hope that in our demo- 
cracy with its understanding of the rules of a market economy the 
Bundesbank will be able to check excessive state expenditure. 



The Dawes plan introduced in 1924 signified a sensational break- 
through towards solving the problem of bow large sums of money 
could be transferred from one country to another. Arbitrary 
despoliation was to be replaced by the proceeds from export sur- 
pluses and from services rendered. The Young plan of 1930 effected 
a few numerical reductions, but fortunately did nothing to change 
the basic idea. This economically-sound solution failed, because the 
victorious powers who bought the greater part of Germany’s 
exports were not prepared to buy more goods from Germany than 
they had done hitherto. Germany was not only an unwanted 
supplier of goods to their own home market, it was also a competitor 
in the rest of the world. Was anyone going to accept a deliberate 
strengthening of this competition? Germany would have been very 
happy to increase its exports, but to achieve this end the world 
market would have had to be opened to its goods. No one was 
prepared to grant Germany this facility. 

There was only one way out of this dilemma. New markets for 
German exports had to be opened up. The world has quite enough 
under-developed or undeveloped countries, countries which have 
every desire to raise their living standards with the help of the 
highly industrialised states. Today such countries are summed up 
in the term 'under-developed countries’. The greater part of Asia, 
nearly the whole of Africa and Latin America fall into this category. 
Their need for industrial products is gigantic, and they can pay 
with raw materials and agricultural produce. It would have been 
simple to develop these markets to a greater degree than had been 




done hitherto. If Germany had been allowed to participate in 
such a development, it would have been possible to realise a profit 
which could have been used to pay the reparation, claims made by 
the victors. Such was the simple and illuminating idea which I put 
to the chairman of the Young committee. Owen D. Young adopted 
it enthusiastically, I explained that it would be necessary to invest 
money before such new markets could be opened up. Germany, 
which had been bled dry, could not raise such money, and here too the 
victors would have to give their help. While the economist Owen 
D. Young - he was president of the General Electric Company - 
understood this idea immediately and was all for its realisation, the 
politicians, especially die French, were hesitant to the point of refusal. 
I proposed that an international bank should be founded for the pur- 
pose of raising the necessary capital. In accordance with the Young 
plan such a bank was indeed started in Basel. Its function was to raise 
loans on the international capital markets and to finance the under- 
developed countries out of the proceeds. Tliis task was incorporated 
into the Young plan in the following words ‘Since the transfer 
of payment in foreign currencies is conditional not only upon import 
restrictions, but also upon the expansion of German exports, we 
examined the possibility of creating a financial institution able to 
contribute to an expansion in world trade by undertaking the 
financing of enterprises - particularly in the under-developed coun- 
tries - which would probably not otherwise be embarked upon with 
the normally-available financial means’. Owen Young said to me 
‘You gave me the idea, and I shall sell it to the world’. But he was 
unable to sell it to the world. The French were not in the market. 
For twenty years the idea lay fallow with the International Bank in 
Basel. In 1950 it was once more taken up by President Truman. 
In his inaugural speech in January, 1949, Truman announced the so- 
called four point programme: 

... We must embark on a bold new program for making the benefits 
of our scientific advances and industrial progress available for the 
improvement and growth of underdeveloped areas ... I believe that 
we should make available to peace-loving peoples the benefits of our 



store of technical knowledge in order to help them realise their 
aspirations for a better life. And, in co-operation with other nations, 
we should foster capital investment in areas needing development . . . 
This should be a co-operative enterprise . . .With the co-operation of 
business, private capital, agriculture and labour in this country, this 
program can greatly increase the industrial activity in other nations 
and can raise substantially their standards of living . . . All countries, 
including our own, will greatly benefit from a constructive program 
for the better use of the world’s human and natural resources. Experi- 
ence shows that our commerce with other countries expands as they 
progress industrially and economically . . . 

This was the same train of thought which Owen D. Young and 
I had formulated twenty years earlier. This time the idea was ‘sold 
to the world’. Particularly the artificial, newly-constructed and 
democratised states, released from Western tutelage and guidance, 
hitched their hopes to Truman’s four point programme, borne aloft 
by so many noble motives. But the fact that they too would have to 
contribute to the better use of the world’s resources did not 
immediately come home to them, they simply looked forward to 
the higher standard of living. Next Truman sold the idea to his own 
country, which participated with massive state aid. Subsequently, 
through the good offices of the World Bank and its daughter 
organisations, the European industrial countries, including Germany, 
participated financially and technically in North America’s develop- 
ment aid programme. In the last decade many milliards have 
flowed into the under-developed countries, partly as gifts, partly as 
loans. If success has not been complete the cause lies in an essential 
difference between the Young plan and the Truman plan. 

The idea of the Young plan was based solely on economic 
considerations. Its extent was determined by the financing possi- 
bilities offered by the international money markets, that is, by the 
amount of private capital available for investment. But the develop- 
ment aid of the four point plan is based on the state’s monetary 
resources. Its extent is determined by political aims and decisions. 
It is not the industrialist, nor the private saver, who determines what 
and how much to invest in foreign undertakings, and whether and 



how far to take part in the task of opening up the under-developed 
countries. The aim and scope of development enterprises is fixed 
by government agencies. They determine where and how much 
money is to be applied. And this money is not raised on the capital 
market but originates in the means at the disposal of die state house- 
hold and the banking credit apparatus. While after the First World 
War it slowly dawned on those concerned that the reparations 
problem must be transferred from the political to die economic 
plane, after the Second World War an economic problem was shifted 
into the political sphere. 

This is at its most evident when one listens to the official statements 
made by leading North-American politicians about the development 
problem. At first the view prevailed that the development aid 
programme must serve to encourage private investment in the 
under-developed countries. Initially, provision of technical assis- 
tance by die state and investment guarantees for private enterprise 
were in the forefront. In 1962 Senator Passman recommended in 
Congress a close collaboration between German and American 
industrial groups in the joint prosecution of trading projects in die 
development countries. Senator Capehart urged that at least half 
of the aid granted to a nation should be undertaken by private 
industrial concerns. Next to this emphasis on development projects 
to be carried out by private industry, anodier noteworthy point of 
view emerged. In a memorandum prepared for President Kennedy 
in the autumn of 1962 Chester Bowles stated as a basic principle 
that development aid must not be mixed up with political 

But in the following year sounds of quite a different kind were 
already being heard. In the so-called Clay report purely political 
considerations came to the fore. There we read inter alia 'Aid to 
border countries on the periphery of the communist block is most 
clearly in the interests of the United States. India and Pakistan must 
be helped, in order to preserve the balance of power in Asia with 
China. Indonesia should be helped only if it renounces international 
adventures. Economic aid to Greece and Turkey must be under- 
taken principally .by die odier NATO powers’. In April, 1963, 



General Clay pointed out to Congress emphatically that foreign 
aid, properly formulated and carried out, is an important tool in the 
armoury of American foreign politics. 

This political overshadowing of development aid has made a 
considerable contribution to the mistrust which is felt in many of the 
countries in need of aid towards the kind of help offered. Instead 
of thankfulness and collaboration in mutual trust, dissatisfaction 
and suspicion has manifested itself in many quarters. The contrast 
with the way in which the Young plan was formulated is apparent 
to all. It can be seen not only in the political aspect of aid, but also 
from the financial and monetary point of view. But it goes even 
deeper. It touches the principles of our life in society. The question 
is whether individual or collective initiative should determine our 
social and economic behaviour. The points of conflict between 
the East and the West - between capitalism and communism as it is 
commonly, but falsely, put - are unfortunately accentuated when 
they are mixed up with nationalistic political aspirations. In a dis- 
cussion which I once had with a very anti-communist Eastern 
politician in Tokyo I asked ‘What do you really mean by com- 
munism?’ He replied ‘Communism seeks to dominate the world’. 
Yet when I inquired whether he meant Russian or Chinese com- 
munism he maintained an embarrassed silence. 

We have two kinds of problem: national and social. The second 
has an elemental priority. The contrast between rich and poor 
must be made less pronounced. Once this has been achieved, 
national problems will also be easier to solve. Yet the solution of 
the social problem depends on the proceeds derived from the 
economy. Before anything can be distributed it must first be pro- 
duced. Thus the question which today splits the world in two asks 
which is the more successful in promoting economic activity - 
the individual or the public authority. 

The cool process of collectivisation has already gone a long way. 
There is hardly a single large overseas business transaction which can 
be carried out without the collaboration and consent of the authori- 
ties. Perhaps it would be a good thing if from time to time we 

’ / 



recalled the speech made in March, 1933, in the Reichstag which I 
quoted earlier ‘In principle the German government will safeguard 
the interests of the German people, not by means of a state-organised 
bureaucracy, but by means of the greatest possible furtherance of 
private enterprise and respect for private property*. 

Today, it is not the productive yield expected from a develop- 
ment project which determines whether and how much money 
should be, can be, or can be permitted to be invested in it. Instead 
these questions are determined by a consortium of politicians or 
officials, by a public authority, or by a parliament. But things used 
to be different. Even before the two world wars there was develop- 
ment aid. Before 1914, too, the United States, Great Britain, France, 
Germany, Holland, Belgium, Switzerland and other countries 
devoted many milliards to the economic and technical development 
of countries overseas. These sums did not come from state sources, 
their volume was not determined by parliament or the authorities. 
Such sums came voluntarily out of the savings funds on offer on the 
private capital market. 

The stock exchange lists of the great international bourses quoted 
a large selection of bonds and shares from overseas. less-developed 
national economies financed themselves by the sale of such securities. 
Today it is extremely rare for similar securities to appear on the 
market. Our present-day development aid is not an object for 
consideration, and speculation by bankers, businessmen or industria- 
lists. Apart from a few exceptions, it is subject to political con- 

In view of Germany's political weakness, it goes without saying 
that the setting of aims is to some considerable degree subser- 
vient to the wishes, if not the pressure, of the victorious powers, 
particularly the United States. Impoverished Germany is second 
only to the United States in granting development aid. The fact 
that the balance of payments has been favourable for a number of 
years, and that considerable gold and foreign exchange reserves 
have been amassed by the Bundesbank, have contributed their 
encouragement to the claims made on Germany. But no one bears 
in mind that in addition to losing its colonies, Germany has lost 


foreign assets worth 30 milliard gold Marks, while the victorious 
powers have enriched themselves. 

The constant tapping of financial resources by the public funds 
and the credit apparatus in order to provide development aid has 
made a considerable contribution to inflation. Development aid is 
paid for not by savings, but by a continuousincreaseinthecirculation 
of money. Rich countries can afford to give presents and grant 
cheap credit to under-developed countries out of their savings and 
accumulated assets. Germany is not in a position to follow suit. 
All that Germany can do without injury to itself is to build up 
enterprises abroad from which it can expect income. But the in- 
dividuals who risk their savings in such ventures must be permitted to 
make their own decisions. Such decisions cannot be left to an 
official body. To what extent, for what purpose, and whether the 
state should use the money which it has gathered in taxes for the 
development of new countries, is a political question. Where such 
financing is accompanied by a progressive inflation, as is actually 
the case in Germany today, the answer must in all events be no. 

The misery which two world wars have brought to mankind 
is enormous. But the disturbances which are the aftermath of these 
two wars are hardly better. Involvement in world war also showed 
the less-developed countries how backward they were in com- 
parison with the civilisation of the West. They have utilised this 
realisation to make far-reaching claims on the victorious powers, 
and they have succeeded in making a mark on the bad consciences of 
these victorious powers, which now seek in. feverish haste to make 
good the omissions of previous years. 

It is a bad error to suppose that the organisatorial and technical 
aspects of the civilising achievements, which the old cultures of the 
West have built up in the course of many centuries, can within a 
few decades, be transmitted to completely unprepared primitive 
peoples. Primitive people also have their culture. It rests on religion, 
custom, co-operation, on temperament and feelings, on the sense 
for beauty and order. But the technical civilisation which Truman 
has in mind is something quite different. It rests on extensive 


1 86 

cognition, knowledge and research, on sustained rational effort, oil 
craftsmanlike as well as industrial experiences and traditions. A long 
period of collaboration, guidance and education is necessary if it is to 
be transmitted to primitive peoples. Institution must be built on 
institution. But above all it is necessary to expend capital savings 
to build up the institutions necessary for technical progress. "Where 
money is available civilisation comes into existence, culture can 
come into being even without money. Culture thrives in impover- 
ished times; in times of prosperity culture is often outstripped by the 
so-called progress of civilisation. German culture never flourished 
more mightily than after the material desolation of the Thirty 
Year’s War. And how far culture has remained behind civilising 
(technical) progress, we can see today. Money is not in itself capital. 
Only saved money can form capital Only when money is put to 
work in production can it find application as capital. No collective 
authority can undertake this task. It must remain in the hands of 
the individual creative entrepreneur. 

We must return to the old method by which we aided the 
development of young countries before the world wars. The 
required capital must be obtained out of our savings, not by means 
of the inflationary creation of money. Thanks to technical progress 
the effort devoted to development ought to become effective far 
more rapidly in our time. Nonetheless, its tempo and extent must 
be determined by the capital market, and not by politics. 

My third proposal was aimed at achieving this end: I suggested 
that five milliards should be taken out of the Bundesbank's illiquid, 
unprofitable gold reserves and put to productive use. The Bundes- 
bank would float an overseas company with a capital of five milliard 
Deutschmarks. With this sum die overseas company would pur- 
chase gold to a value of five milliard Marks from the Bundesbank, 
and as a result the incorporation money would revert to the Bundes- 
bank, In place of five milliards in gold (out of a reserve of seventeen 
milliards) the Bundesbank would have on its books five milliard 
shares of the overseas company, which in its turn would now possess 
five milliards in gold. With a cover backing of five milliards in 
gold the overseas company would then raise loans on the German 


capital market, and use the proceeds for development aid. It would 
undertake this development aid together with private concerns. 

This scheme observes all the basic principles enumerated in the 
foregoing. The inflationary increase in the circulation of money 
would be abated, because the financing of development aid would 
be taken out of the hands of parliament. Its extent would no longer 
be determined theoretically under political pressure, but would be 
strictly conditioned by the capacities of the capital market. All 
suspicions of political motives would vanish, because decisions would 
be taken on the basis of purely economic considerations. In addition, 
the public authorities would be spared the worry of raising capital 
to cover outlays in quite a considerable field. 

Young countries are not greatly served by purely material help. 
It is equally important that ‘know how’, the technical and organisa- 
tion knowledge which makes it possible to apply material help, 
should also be imparted to them. Foremost in this respect is to know 
how to handle money. All the world knew that the Reichsbank 
had conquered the first inflation and stabilised the German cur- 
rency, that a well thought-out and forcefully-prosecuted credit 
policy had succeeded in abolishing unemployment involving six 
and a half million workers, and that German foreign trade had been 
maintained at a high level through the introduction of a bilateral 
offset account system. 

Thus it was not surprising that after 1945 a number of young 
countries approached me in order to avail themselves of my expertise. 
Germany, which was in the care of guardians, had no use for my 
expert knowledge. An attempt by American republican circles 
to enlist my aid in reforming the new German currency foundered 
because of the opposition of the fanatical Morgenthau politicians. 
Later, when certain powers once again reverted into German hands, 
the rulers did not consider me to be a suitable collaborator. Already 
before my political persecution was over, Chancellor Adenauer 
urged upon me in writing not to return to public life. In the 
interests of the responsible government which he was endeavouring 
to create I gladly did him this favour. My first article in Der 
Spiegel appeared in 1948 under the title I do not wish to intrude. 



Nine foreign governments discussed their monetary and economic 
policy problems with me. The first to consult me was the dynamic 
government of Indonesia. A three-month stay in this land, endowed 
with fabulous natural resources, has left me with a deep and lasting 
sympathy for the Indonesian people. Once its national aspirations 
have been satisfied, Indonesia will become one of the most flourishing 
countries on earth. Except for wool and cotton, it has almost 
limitless reserves of all raw materials. There is no grass for sheep to 
graze on, and the climate is not suitable for cotton. Instead there is 
every kind of wood fibre. 

At the end of my visit I made a report which was printed in 
German and Indonesian. All higher government officials were 
given a copy to study. In the course of the country’s development 
the government has put not a few of my recommendations into 
practice. If the economic, and particularly the monetary, develop- 
ment of Indonesia does not always make allowance for Western 
viewpoints, the cause lies in the vehemence with which national 
political interests are given precedence over all other considerations. 

The high level at which the characteristic bearing of this lovable 
people must be assessed was demonstrated when I was confronted 
with an example of Western stupidity. After my Indian friend Mirza 
Ismail had lost his post as President in Mysore owing to India’s 
new political reorganisation, he accepted a UNO post in Djakarta. 
When a UNO representative, a Canadian called Kinlyside, came 
to Indonesia on a visit, my friend held a reception on his behalf 
to which my wife and I were invited. When the guests were intro- 
duced we greeted Mrs Kinlyside, who shook hands with my wife 
and myself. Then Mr Kinlyside also shook hands with my wife, but 
when he came to greet me, he withdrew his hand with the words 
‘I will not shake hands with you, I know all about you’. With an 
apology to our host, my wife and I left the reception immediately. 
The following day brought two reactions to Mr Kinlyside’s be- 
haviour. The Indonesian government gave him to understand 
that there was no room in their country for people who insulted 
their guests; and Mirza Ismail gave up his UNO activities. I for 
my part mollified my Indonesian friends with a reference to a poem 



by Scumes which closed with the words addressed by a Canadian 
Red Indian to a white man ‘Now you see we savages are the better 
people after all’. 

In Syria, the government was confronted with the task of re- 
placing the private French central bank by a nationalised central 
bank. It had commissioned a Belgian financial expert to make a 
report, and asked me to check his findings. To everyone’s satis- 
faction I was able to approve the Belgian’s report in every parti- 
cular. A few further recommendations which I made were subse- 
quently adopted. 

I was called to Iran by one of the most capable men I have ever 
met. Mossadegh was one of the few statesmen who succeeded in 
reducing the corruption, traditional in Persia, to a minimum. 
Mossadegh foundered politically because of his insufficient under- 
standing of the Anglo-Saxons. Perhaps they have realised in the 
meantime that he was ahead of them and his times. 

Thanks to good English administration India was well on the 
way to organic growth in its economic development. Its captains 
of industry Tata, Birla, Jalan, Sarabhai, and many others have 
considerable achievements to their name. A few enlightened 
Rajahs, particularly those of Mysore and Hyderabad, also achieved 
exemplary advances in the administrative field. Yet the enthusiasm 
which accompanied India’s accession to full political independence 
led the Indians to tackle their difficult tasks too hastily and too 
ambitiously. It so happened that I was in India when the first five- 
year plan was drawn up. Nehru asked me to give him my opinion 
on it. It was the first time that I was obliged to disagree with those 
who asked me for my views. I arrived at the conclusion that the 
magnitude of the plan and its investment requirements far exceeded 
the available resources. I advised against the preparation of a five- 
year plan encumbered with such detailed advance dispositions. I was 
of the opinion that the political propaganda effect which it was hoped 
would result from this plan could easily turn into its opposite. 
‘Every year,’ I said to Nehru, ‘you will be asked how much of this 
plan has been realised. Let the industrial planning develop organically 
with the help of private enterprise. Concern yourself instead with 



the promotion of agriculture. Start one regional irrigation scheme 
after the other. li every year you can proclaim that so many more 
hectares have begun to produce foodstuffs, then this will be far more 
effective propaganda than the announcement of your five-year 
plan/ I believe that actual developments have proved me right. 
India’s commercial credit has fallen because of its excessive foreign 
indebtedness. Today it lives on its geographical significance in the 
power game of Western politics. 

Nehru showed himself deaf to my views. In his country as in 
some others purely political considerations overshadowed all 
economic interests. I had the same experiences in Vietnam, in 
Algiers, in Egypt and in the Argentine. Everywhere my recom- 
mendations were approved in theory, but no one could be persuaded 
to put them into practice. As a result I did not always make friends 
amongst the ruling politicians. In the conflict of the parties, and 
under the pressure of international events, governments also change 
too frequently, so that even with the best will in the world it is 
impossible to achieve positive results. To be quite honest, the role 
of advisor is a thankless one. 

When die governors of the Argentinian central bank rejected my 
findings with ironical remarks, informing me that their president 
would shortly fly to Europe and return with a pocketful of credits 
which would put Argentina’s affairs into order, I could only wish 
him a happy journey. As could have been foreseen, his trip was 
most unsuccessful. Yet this country, richly endowed by nature, 
suffers only from defective organisation of its monetary economy. 
In a country possessing so many commodities for world-wide 
trading as does Argentina with its valuable meat and other agri- 
cultural products, it should be child’s-play to create a well-ordered 
money and credit system. In such a country the policies pursued 
by the central bank alone, even without state management, can 
further the economic order considerably. 

Next to Indonesia my greatest and happiest success was in the 
Philippines. The Philippine National Bank (not the central currency 
bank) together with the President of the State, Garzia, invited me to 
pay the Philippines a visit. I spent four weeks in Manila studying 



the country’s economic conditions, and soon discovered that the 
main trouble with the country was that everyone tried first and 
foremost to make something out of the state. The president of the 
central currency bank, who did his best to bring about a healthy 
financial and monetary situation, was also not up to coping with 
these circumstances. My report dealt fairly and squarely with the 
situation, and would no doubt have foundered on the rocks of 
political intrigue had the opposition not adopted my proposals as 
part of its policy. This helped the opposition to win the next election. 

The mere giving of money is seldom a suitable way to help 
countries which need and are ready for development. In my work 
I was constantly concerned with finding new solutions to the prob- 
lem of how one should proceed in order that the productive 
resources of a young country might be developed. Soon after I 
had concluded my Indonesian report, I made a practical suggestion 
to the Indonesian government. 

In South Sumatra there are deposits of iron ore which are worth 
mining. After the liberation the workings had been abandoned. I 
interested a Rhenish-Westphalian mining concern in exploiting 
these deposits with their own capital and under their own technical 
direction. The ores were to be sold abroad - I had Japan in mind. 
Blast furnaces, and later rolling mills, were to be built with the 
proceeds in foreign exchange. When interest on the invested capital 
had been paid and an appropriate profit on the investment had been 
made, the whole enterprise was to be handed over to Indonesia. 
At the time the Indonesian government was not yet sufficiently well- 
organised to carry out this proposal. But in the spring of 1963 
President Sukarno came back to the idea, and proclaimed it as part of 
his economic policy programme under the heading of ‘production 

After this my attention was drawn to a practical project. The very 
considerable Sumatran palm kernel harvest could not be fully 
utilised industrially because there were no refineries. I accepted the 
challenge, found the necessary capital in Germany and drew up a 
working programme. Germany was to build the plant and to run 
it until sufficient revenue had been derived from the sale of palm oil 



to enable the capital to be repaid with interest, together with a 
suitable margin of profit. This would have taken three years at the 
most. Although the development ministry of the Bund gave lively 
support to the plan, it foundered on shoals of bureaucratic formalities 
imposed by the other Bund authorities which were involved. 
According to my information the Japanese have undertaken a 
number of different joint enterprises with the Indonesians on the 
principle of ’production sharing’. 

The palm oil refinery project is only one of many possibilities 
for the development of young countries. Mining, forestry, fishing, 
agriculture, etc offer opportunities for opening up new sources of 
exportable goods, the proceeds from which in foreign exchange 
ensure that interest on and repayment of the capital invested by the 
foreign lender will be received.. Should it prove desirable to promote 
such joint enterprises, then a guaranteed sale of the resulting goods 
at fixed prices is a way of helping development also open to countries 
like Germany which have no surplus capital. 



It is one of the tasks of everyone responsibly engaged in economic 
activity to make reserves and to build up some capital. No one 
wishes to be exposed to the fortuitous incidence of illness, accident 
or unemployment without being able to fall back on a reserve. 
Everyone wants to be in a position to go on holiday, to enjoy his 
old age, to have leisure for self-development. It is degrading to 
exist merely from hand to mouth. Whether one makes his capital 
by savings and sacrifice, or by profit and speculation, is not of the 
essence for our investigation. Here we are interested in the role 
played by money in the building up and preserving of capital. 

To amass money is .the most comfortable way of building up a 
fortune, because it can be saved in the smallest quantities. A child’s 
piggy bank, or the savings book of a savings bank can be used for 
the smallest of amounts. When these accumulate in the course of 
time the resulting sums can be converted into large property values, 
plots of land, shares in a business, etc. To achieve this end one thing 
is essential: the money must retain its value throughout the period 
over which it is saved. After I had published my warnings in the 
magazine Qwcfe, I was almost buried in a flood of inquiries, which all 
asked how one could invest one’s savings in such a way that they 
would not be affected by the creeping fall in the value of money. 

Assets constant in value which can be acquired for small amounts 
of money are rare, one can almost say they are non-existent. For it 
is not only a question of preserving value, it is also desirable to 
hold one’s capital in a form in which it is easily accessible in hard 
times. Coins, postage stamps, painting, objects dart, which can be 




purchased for small sums, are not of much use in times of need. 
True, they can be sold for money, but usually their value fluctuates 
wildly because they are subject to the vagaries of fashion. Such 
value depends not on the needs, but on the foibles of individuals. 
Recently offers by the thousand have been made to the public, 
inviting and advising them to put their money into postage stamps 
as an investment. The stamp dealers have made use of the fact 
that the small man is hard put to it to find assets in which he can 
invest his small savings. A similar type of sales propaganda advocates 
the purchase of coins as an investment. And recently we have even 
seen sales brochures which extol the virtues of diamonds, and exhort 
savers to buy them as investments. 

To put one’s savings into commodities such as metals, wood, 
building materials, or articles for everyday use, (domestic goods, 
tools, etc) is possible. But since such commodities are dealt with 
in the normal course of trade a costly organisation for their acquisi- 
tion, storage and sale in case of need is required. A considerable 
expenditure of one’s own labour and time is also necessary, and there 
is a great element of risk. Similar considerations apply to the acquisi- 
tion of a share in a productive concern, insofar as this is at all possible 
with small sums of money. This leads one to say that money and 
monies due offer the only means of saving in order to build up a 
fortune which is open to the broad masses. 

In a fully-employed economy, savings capital comes into being 
comparatively rapidly. On the occasion of the twenty-fifth anni- 
versary of the reign of William II in 1913 a number of inquiries 
into the wealth and welfare of the German people were conducted. 
At that time the annual capital growth was calculated to amount to 
10 milliard Marks. Today an annual capital growth of 15 milliard 
Marks is estimated for West Germany alone (here it must be 
remembered that this figure is expressed in an inflated currency). 
In an economy whose stock of capital goods was so sadly depleted 
as Germany’s after the Second World War even a high rate of capital 
growth can only make a partial contribution to the needed restora- 
tion of the assets which were in existence before the war. The 
construction of new dwellings, new factories, new machines, new 



routes for and means of transport, requires immense sums of money. 
In addition, many plants and machines were antiquated, if they were 
not destroyed, and countless concerns are in need of rationalisation. 
Furthermore, the increase in population necessitates a continuous 
increase in the means of production. There is also a great need to 
rebuild Germany’s foreign trading organisations, without which 
the necessary increase in Germany’s exports could not be brought 
about. Germany’s capital needs by far outstrip Germany’s capital 

Unfortunately, the endeavour to convert the largest possible 
proportion of savings into productive apparatus contributing to the 
reconstruction of Germany was not successful. A frighteningly large 
proportion of the monies which could have been saved has been 
spent on immediate consumption instead of being employed in 
production. Expenditure on ephemerals has by far exceeded all 
reasonable bounds. Even if one sees no objection to the desire 
to regain a former standard of living after all the privations of war, 
and even if one regards a rise in the standard of living as justified 
and desirable, nonetheless the reasonable boundaries have been 
exceeded. Here it is not only the craze for amusement and enter- 
tainment and the urge to travel which are held in the balance, but also 
the unusually heavy import of foreign consumer goods. The en- 
couragement of import, by means of which it was hoped to damp 
down price inflation, has made a considerable contribution to the 
withholding of capital savings from production. No one can reproach 
me with begrudging anyone anywhere a higher standard of living. 
Here 1 only wish to make it clear that the slogan prosperity for 
all’, conspicuous consumption, and the rapid transformation of 
inflated money into transitory comforts, have all impeded invest- 
ment and its financing out of savings. 

It is gratifying to know that since my warning call the govern- 
ment of Federal Germany and the Bundesbank have concerned 
themselves with taking steps to retard these processes. By means of a 
restrictive credit policy they are endeavouring to alleviate the price 
situation. The economy is coming to realise that some restraint in 
the financing of investment by means of short-term bank credits 


must be exercised. Doubts about whether it was correct to assist 
the politically-dubious Common Market by favour ing imports 
through prepayments which jeopardised Germany’s foreign exchange 
surplus are beginning to emerge. Our wasteful way of life runs 
counter to the need to finance investments. Yet die tendency to 
squander originates in the constant fall in the value of money. 
Stable money would reduce the amounts squandered, and once 
again make saving attractive, because then the small man too would 
be able to build up capital. The small savings accumulated by the 
broad masses would once again flow into bonds, loans and mortgage 
debentures, and contribute to die financing of investment. 

For its reconstruction the German economy needs as much by 
way of savings capital as it is possible to accumulate. Savings 
capital must constandy be converted into real goods which alone 
constitute the national wealth. The small man’s saved pennies 
accumulate ill the savings banks and the banks, and these for their 
part makes this money available to the productive economy by 
granting it credit. It would be logical if the saver were to share in the 
producing, and manufacture real goods in the proportion of his 
savings contributions, but this is not the case. Nor do the banks and 
savings banks obtain a share of the real goods produced with the 
credits granted by them. They are only go-betweens - the lender, 
for his part, however, converts the money given in credit into 
valuable real goods. The saver merely receives a claim to money, 
but he expects this claim to retain its value during the tenancy of 
his loan. So long as it keeps its value all is well. But should it 
depreciate, then the saver has been deceived. It must be the first 
and foremost aim of all economic and monetary policies to avoid 
this deceit. Ill the last ten years this currency deceit has not been 
avoided. Naturally it was not intended. It is poindess to look for 
those who are to blame. But it is necessary to recognise die causes 
which have led to the devaluation of money, and to remove them. 

Ever since indignation about the continuous depreciation in the 
value of money began to be voiced by an ever-growing number of 
voters, we have heard politicians promising to tackle the causes of 
inflation. Restrictions on state expenditure, credit curbs, public 



savings measures, all these and more are on the agenda. Let us 
hope that these good intentions are put into practice. The authorities 
have been more active in lessening the effect of the creeping depre- 
ciation in the value of money on the saver by improving his 
income from current investment through premiums on certain 
kinds of savings, tax concessions on certain kinds of securities, etc. 
These concessions have not been entirely successful. The depreciation 
of money has progressed faster than the premium pledges could 
make up and such premiums have also led to a greater financial strain 
on the budget. 

Recently, concerted efforts have been made to popularise the 
purchase of shares amongst a wider range of savers. By purchasing 
a share the saver obtains a participation in the substance of a trans- 
port, industrial or trading concern conducted in the form of a joint 
stock company. He receives a real value. Does this serve his interests? 

The saver seeks three tilings for his savings: liquidity (the easiest 
possible reconversion into ready cash), constancy of value (no loss 
in substance) and a fair annual return (interest or dividends). The 
purchase of shares by the individual saver normally takes place 
through his bank on the stock exchange, accessible to all and sundry. 
Now the stock exchange is also the field of activity for people who 
are specially gifted for speculation. They buy shares in the expecta- 
tion that a company’s rising profits will lead to a rise in the price 
of its share. They seek their profit not from the annual dividend 
yield, but from increases in share quotations. Each rise or fall in 
dividends leads to a rise or fall in the quotation of die share con- 

The saver cannot buy a share at its nominal value, but in almost 
all cases only at .a price above par. He pays a premium for the 
speculative opportunity which the share offers. If a fixed interest 
bearing security (bond or mortgage debenture) carrying interest 
at six per cent can be obtained at par, then an equity (share) with a 
dividend of six per cent will be substantially more expensive. A six 
per cent dividend on a share which costs 120 per centum gives a 
yield of only five per cent and not six per cent. Thus anyone who 
invests his money in shares must from the very beginning reconcile 


himself co a lower rate of interest than he would obtain from an 
investment in fixed interest bearing securities (government bonds, 
mortgage debentures, debentures, etc). The average yield on all the 
shares handled by the stock exchange fluctuates at around three per 
cent. The saver who buys shares is seduced by the expectation that 
be will be able to make up the missing proceeds by speculating on a 
higher selling-price. Shares make savers into speculators. 

This is hardly to respect the saver, it even implies disrespect for 
money. It is a common consequence of inflation. Constant de- 
preciation in the value of money leads to squandering, to light- 
hearted expenditure (gambling, betting, stock exchange speculation, 
bingo, etc), to unnecessary and unproductive luxury. Squander- 
mania and luxury are hostile to every savings urge; they are the 
gravediggers of saving. They diminish the sense of responsibility 
which should imbue every citizen with the desire to make provision 
for accidents without expecting the state, i.e. the taxpayer, to shoulder 
the whole burden of his care and welfare. 

Two cases of share placings amongst savers which have so far not 
turned out well arc those of Volkswagen, and that of VEBA. The 
circle of purchasers was artificially restricted to those within certain 
income brackets. The shares were offered at a price which was not 
shaped by stock market influences but which was arrived at quite 
arbitrarily. It was assumed that this price lay below the market price 
so that the buyer could count on an immediate gain. This proved to 
be the case with Volkswagen, but did not occur widi the VEBA 
shares because the selling-price had been pitched too high. In order to 
soothe the indignation felt by the purchasers disappointed in their 
expectations, the VEBA quotation had to be supported on the stock 
exchange by state purcliases. The Volkswagen share quotation 
fluctuated between 900 and 400. 

Anyone who has followed the ups and downs of stock exchange 
quotations over the past five years knows what heavy losses were 
suffered by those shareholders who bought at too high prices. That 
others who bought cheaply made profits is no consolation for the 
saver. He is not in a position to react in good time to the fluctuations 



in stock exchange quotations. He has no kind of influence over the 
management of the joint stock companies in which he has a small 
share. The so-called co-partnership rights of the employees which 
are exercised by the supervisory board elected by them make a 
certain amount of sense insofar as question of wages policy and the 
regulation of working time are concerned. But they have no 
application to the technical or commercial administration of a con- 
cern. In most cases the administrative policy is laid down and the 
administrators chosen by those shareholders who have so large an 
interest in the concern that they control the deliberations of the 
annual general meeting. 

In order to enable one to appreciate that the character of the joint 
stock company has changed greatly in our present day, one must 
study the history of its development. When the first large concerns 
came into being in the German national economy, they went far 
beyond the capital resources of individuals. The joint stock com- 
pany was an admirable instrument for the carrying out of larger 
economic undertakings. The entrepreneur sought out friends and 
interested parties who jointly raised the capital necessary to take up 
the shares. In the beginning the participants kept in touch, had 
discussions, and made joint decisions about the management of the 
business. The natural changes in relations with family and friends 
soon led to these shares being made negotiable. The stock exchange 
extended its activities to cover such shares, and made the share into 
an anonymous tool which could at will be transferred from one 
owner to another. The original circle of interested parties which 
determined the tasks and policy of the concern slowly disappeared. 
New circles were formed, not always interested in the management 
of the concern, but more concerned with the profitable investment 
of their capital. When market conditions looked favourable shares 
were bought, when tilings took a turn for the worse they were sold. 
The share became an extremely mobile element which changed 
hands rapidly. Because a company • meeting could be controlled 
with only 51 per cent of the share capital, these shares became a 
desirable object for entrepreneurs not merely concerned with 
earning interest on their capital, but also wishing to participate in 



the conducting of a company’s affairs. It was not only the pure 
capitalist who bought the shares, but also the entrepreneur. For him 
the share was attractive not merely as a means of earning dividends, 
but also as an instrument for the development and control of a 
company. This was the beginning of the era of the formation of 
large combines. Shares no longer changed hands at a rate dependent 
on market conditions; even during slumps they continued to be held 
by large shareholders and entrepreneurs. 

Today, new joint stock companies are founded only rarely. The 
capital for new enterprises or for expansion is almost entirely 
provided out of the accumulated profits of the large concerns or their 
large shareholders. About 80 per cent of all German joint stock 
companies are in firm hands. This means that only some 20 per 
cent of all existing shares are traded on the stock exchange, not more 
than a few milliards. Those dealing on the stock exchange play a 
merry and cunning game with this 20 per cent of shares. This does 
not mean that I am against the stock exchange. I consider the stock 
exchange to be just as important as any other commodity market. 
One need only remember that the turnover in shares is only a small 
part of the activity of a stock exchange, a part which dwindles into 
insignificance when compared with the turnover in loan funds 
and fixed interest-bearing securities. The stock exchange is and 
remains a necessary market for the distribution of the monies 
which are daily transferred in large quantities from those who have 
money to spare and lenders, to those who need money and borrowers, 
as well as for the purchase and sale of fixed interest stock. 

One of our leading bankers recently expressed the opinion that if 
three per cent of the amount at present in savings accounts were to 
be invested in shares, this would lead to the sale of shares to a value 
of three milliard Marks. He completely overlooks the fact that 
shares available on the stock exchange are in no way commensurate 
with a demand of this size. Sales of this order would only further 
decrease the number of shares dealt in on the stock exchange. After 
all, the idea of interesting the saver in buying shares is to persuade 
him to hold shares as investments, and not to re-sell them on the 
stock exchange. Let us leave the stock exchange in the hands of the 



professionals and the dedicated speculators; it is not suitable for the 
saver. The saver need not envy the speculator. He seeks security, 
not risk. 

It is true that a share can usually be converted into cash, but fre- 
quently only at a price per share which is less than the original value. 
Its yield fluctuates, and is on average considerably lower than that 
of fixed interest-bearing securities. In order to reduce the risk 
inherent in shares investment, the so-called investment, or unit 
trusts, have been devised. These are a collection of shares of the 
most varied companies in all branches of industry, so that the risk 
is better distributed. But apart from thus spreading the risk nothing 
has basically changed so far as the saver is concerned. In the invest- 
ment trust, too, the shares retain their speculative character. 

The idea that the circle of those who invest part of their fortunes in 
shares should be enlarged is of course quite a proper one. The financ- 
ing and growth of new industrial concerns requires very large sums of 
money. To provide these sums the capital savings of the broad 
masses must also be utilised. This can in many cases be done by 
floating industrial loans, as frequently happened before the war. 
Yet such loans can only form part of the working capital of a 
company. Thus it will also be necessary to increase the company 
capital by the issue of shares, particularly since one of the pre- 
conditions of floating a loan is always that the value of money 
should remain stable. 

Taxation legislation which facilitates and promotes the founding 
and running of joint stock companies is a prime necessity, should one 
wish to create share capital. No such taxation legislation exists 
today. On the contrary, there is a trend to replace the joint stock 
company form by the private limited liability company form. In our 
time an endeavour is being made to encourage the formation of capi- 
tal savings by means of savings premiums. It seems probable that the 
favouring of share issues would be far more effective in attracting 
capital savings into industrial capital funds. In its present form, 
unfavourable from the tax point of view, the share - quite apart from 
the inherent risks — has little attraction for the saver. 

To be capable of coping with the demand a stock exchange must, 



like any other market, have at its disposal an adequate quantity of the 
product in which it deals. That is not the case in Germany at present. 
The volume of share transactions on the German stock exchanges 
bears no comparison with the turnover of the London, Paris - let 
alone New York - stock exchanges. The smaller the number of 
shares which is on the market, the higher the rises in the quotations. 
The greater the number of shares available, the smaller the effects 
of speculations. An increase in the quantity of shares dealt in on the 
German stock exchanges is highly desirable. It would also help to 
combat the trend towards larger combines. And quite of its own 
accord, such an increase in the number of shares available would 
lead to a strong increase in the popularity of shares with savers. 

The transfer of the state’s share holdings into private hands is also 
strongly indicated. Such a transfer must, however, be conducted 
on strictly commercial lines - the shares must not be transferred 
by way of a gift to the socially-privileged. Should it not prove 
desirable to make use of the banking consortiums for the marketing 
of these shares, the Bundesbank ought to be entrusted with putting 
these shares on sale direedy through the stock exchanges. 

A great increase in the number of shares dealt in on the stock 
exchanges is the only means by which Germany could approach 
the admirable state of affairs in America where the broad masses are 
extremely interested in share ownership. Germany’s legal provisions 
regarding the participation of employees and regarding large-scale 
business publicity would carry more weight without being open 
to so much objection if the interests of the broad masses did not rest 
on these legal provisions as well as on the alertness of those who have 
participated from the very beginning. Our large shareholders and 
great concerns are always afraid of losing influence should they not 
have the majority vote or a controlling minority interest. But socio- 
political developments will from now on aim at restricting the power 
of mere ownership, and support the influence of the diligent. The 
masses will always find it necessary to follow leading personalities, 
but not those who merely own property. However curious it 
might sound, in the masses, too, each single man thinks individually. 
He too looks for his welfare and prosperity not to a committee but to 


a single man. For this reason the collective union policies will in the 
end be denied ultimate success. It is devoutly to be hoped that the 
directors of our economic policies will find ways and means of 
popularising shares by putting more of them on offer. The law*- 
making authorities, for their part, will have to take steps to make 
things easier for shares so far as formal and tax questions 
are concerned. 

I do not intend to strike an attitude on the problems of the distribu- 
tion of wealth, which , are always brought into the foreground, 
particularly by the unions. The distribution of the social .product 
is a social problem, not a monetary one. But a few points of view 
advanced by the unions are relevant to our theme. I quote here 
from resolution No. VII of the sixth union conference of the union 
for the metal industry which took place in i960. Here we read 
'wage-earners should in all cases aim at building up their financial 
resources by the accumulation of freely disposable assets'. The 
qualification ‘wage-earners’ makes this formulation suspect. It 
originates in the very one-sided understanding of the interests of a 
certain section of the population. Another formulation from this 
same resolution makes this still clearer: ‘the constant growth in 
the wealth of big business should be made accessible to the general 
building up of financial resources by wage-earners.’ It is not merely 
employers, managers or wage-earners .whom we have to thank for 1 
the constant growth in the wealth of big business - all sections of the 
population play a part in this growth: the free professions, dealers, 
haulage contractors, insurances, brokers and agents, officials, scien- 
tists, and so on. And the restriction to big business also shows that 
the problem has been tackled quite one-sidedly only from the point 
of view of the unions. 

It seems that the union leaders themselves have come to realise 
this fact. The most recent attitude towards the distribution of 
wealth, expressed as follows by the German association of trade 
unions (Deutscher Gewerkschaftsbund) on 6 October, 1964, seeks 
to avoid such errors ‘In future economic policy must strive for a 
just participation of all sections of the community in die building up 



of national wealth’. Another ambiguity, which was also contained in 
the previous resolution, remains. We read: ‘In furtherance of the 
aim of an effective building up of financial resources wage-earners 
must have the fundamental right of disposal over their property/ 
This is most confused and leaves many doors open. Fundamentally 
the workers should be able to dispose. Not the individual worker? 
Should there be a communal right of disposal? If so, then one may 
ask what rights the individual has in the communal disposal. What 
is to be understood by the furtherance of the aim of an effective 
building up of financial resources? Does this mean any restriction 
upon the individual in the way he utilises his share of the national 

A mere recitation of the phrase ‘just distribution of wealth’ does 
not bring us any nearer to a solution of the problem. A distribution 
of wealth which treats the incapable in the same way as the capable 
cannot be called just. The masses find it perfectly natural that the 
capable and gifted should be rewarded more highly. No one has 
yet complained about the high fees paid to pop singers or prize 
fighters. The idea of collective savings gives rise to the fear that its 
ultimate aim is to bring the administration of the collective wealth 
into the hands of the trade union leaden by means of co-operative 
organisations. Accumulated collective wealth results in sums which, 
contrary to the assets of the small saver, permit immediate conver- 
sion into large-scale real goods, such as landed property and indus- 
trial shares. This would permit trade union officials who lack the 
necessary entrepreneurial qualities to exert a considerable influence 
on industrial concerns. 

Marxism demanded the nationalisation of the means of production, 
and thus the handing over of property to the democratic totality 
of which everyone forms part. But the collective saving which the 
unions propagate would lead to the workers’ property, its use, 
and its influence, being transferred to the trade union leaders, i.e. 
to a non-democratic, that is oligarchic, officialdom. The individual 
worker would be deprived of the enjoyment of his own financial 

The equality of all men is a wonderful principle for all claims in 



the field of mutual economic relationships. But we are all under 
the obligation to develop our powers each according to his talents 
and abilities. Unfortunately talents and abilities are not equal. And 
when the unions today advocate so-called collective saving they 
are setting a completely wrong aim. To allocate wealth to a many- 
headed board, a group of union members, or any similar social 
group to which the individual saver or shareholder is attached, does 
not represent property. Property over which one has no right of 
disposal is not property. It is not the judicial right of ownership 
which is the criterion, but the freedom to deal with one’s own 
property as one sees fit. 

Here the difference in outlook between individualism and collecti- 
vism is made transparendy clear. Each and every individual seeks 
the opportunity to develop his faculties, to pursue an activity which 
accords with his inclinations and to be at liberty to enjoy the fruits 
of his labour. Therein lies his freedom. For this reason it is the aim 
of democracy to give equal opportunities to all men. To take from 
men the right to employ the product of the successful grasping of 
opportunities in their own way leads to unfreedom and dictatorship. 

In the modem national economy there is only one way to build up a 
fortune, namely through money and claims on money. The rapid 
mobility of money is its greatest advantage. Since the small saver 
always needs some considerable time to accumulate an amount 
which can be invested in real assets, it is crucial for him that the 
value of the saved sums should remain constant and easily rendered 
liquid in the meantime. That is why the savings deposits with 
savings banks and banks are today growing so much more rapidly 
than investment in certified claims to money (bonds, debentures, 

Before the war investment in certified claims to money formed the 
principal element in building up a fortune. They offered high 
liquidity because bonds, mortgage debentures and loans were dealt 
in daily on the stock exchanges in large quantities. The stock 
exchanges were needed not so much for dealings in equities, as for 
the large daily turnover in money and fixed interest bearing securities. 



Today things are fundamentally different. Because of inflation 
the stock exchange turnover of fixed interest stock is small The 
great capital saving institutions in which the saved funds accumulate 
have replaced the individual small saver. The saver stays liquid, 
the institutions buy securities for investment and take risks. 

As a result of war and economic crises a number of concerns in the 
form of public companies have come under state ownership. The 
idea to return such concerns into private hands was and is correct. 
The state is an administrative institution, and is not suited to running 
economic enterprises bound up with risk. Initiative, a wealth of 
ideas, the ability to make quick decisions, competition and many 
other things arc needed to make such enterprises succeed. Enter- 
prises which are not subject to these requirements, or enterprises 
which may in the interests of the community be given the character 
of a monopoly, might be suitable objects of state enterprise. The post 
office, the railways and the airlines are examples. Whether certain 
basic industries also fall into this category (mining, forestry, minerals 
and ores) is open to question. But a manufacturing industry without 
private enterprise is unthinkable in modem international competitive 

At one time I myself was concerned in returning into private 
ownership a large parcel of shares which was in the hands of the 
state. During the banking crisis of 1931 the Deutsche Golddiskont- 
bank (German Gold Discount Bank) which belonged to the Reichs- 
bank took over shares in die Dresdncr Bank to a nominal value of 
45 million Marks. Four years later the Dresdner Bank approached 
me with the request to release these shares, since the bank was 
now in a position to place them with its clients. The Reichsbank 
immediately acceded to this request. The shares were not acquired 
by some big vested interests, but were placed amongst the general 
public. Today too there are only a few banks the direction of which 
is influenced by groups with vested interests. The shares of the three 
large deposit banks in particular are distributed amongst the German 
public at large - in contrast to a considerable number of industrial 
concerns which are subject to the influence of certain individual 



Should our government wish to relinquish control of those public 
companies which would fare better under private enterprise, then 
the methods of returning such companies into private hands used 
hitherto should be changed. Economic enterprises should not be 
given away. They should be offered to those who have an interest 
in directing the economic policies of such concerns, and who possess 
the required qualifications. The price should be arrived at on the 
basis of the price which would be formed under competitive 
conditions on the open market. And the saver should not be 
enticed into buying shares. 



My alarm call published in the aforementioned illustrated magazine 
had an effect which was far-reaching in its extent and which came 
at the right time. Since then the theme of inflation has never ceased to 
be in the forefront of public discussion. Even if it was possible to 
damp down such discussion before the Bundestag elections in 
September, 1965, after the election was over the theme returned to 
the centre of the stage. Above all, the Bundesbank summoned up 
the energy to change its attitude. At fust it merely cajoled, and 
placed the responsibility fair and square on the shoulders of the 
government, but then it realised that talk was not sufficient, that it 
had to act. To appreciate this fact one need only compare two 
speeches by Blessing, the first in January, 1965, at the Berlin stock 
exchange, and the second on the occasion of the conference of the 
German co-operative society in Baden-Baden in October, 1965. In 
his first speech Blessing sought to play down die possibility of 
price rises and infladon, in the second speech he defended the 
Bundesbank’s restrictive policies and asserted that to combat the 
deceit of inflation he would not shrink back from deflation. In any 
case, Blessing has at last applied the brake to the excessive credit 
granted by the banking system, and is making an effort to restrain the 
public authorities from making too great demands on the capital 
market. Even if such measures have come somewhat late in the day, 
they should nonetheless be acknowledged. It is to be hoped that the 
Bundesbank remains firm, but after the laissez-faire policy pursued 
hitherto it is not easy to dispel all doubts. 

The fact that towards the end of 1965 the Bundesbank released 



one milliard Marks from the minimum reserve to the banks also 
has grave overtones. This milliard could not have been obtained 
by the realisation of some assets or other (gold or Dollars) but only 
by resorting to the bank note printing presses, and thus by means 
of an inflationary increase in the circulation of money. As I have 
shown in the previous pages, the Bundesbank put its head in a 
noose when it accumulated a minimum reserve. 

Unless the Bundesbank takes a different road, it will be unable 
to prick the banking system’s credit balloon. One such other road 
would be to say to the banks ‘So you need money? Then give up a 
part of your over-extended activities. We are prepared to take over 
from you a proportion of the credits which you have granted to 
German industry for the purchase of raw materials overseas. We 
will finance these purchases out of our Dollar holdings, and will 
thus not be compelled to increase the circulation of money. You 
for your part will have more funds with which to improve your 

The mistakes in monetary policy which need to be remedied are 
considerable. Nothing has been done to combat imported inflation. 
The resulting flood of money has given a new and powerful impetus 
to the boom conditions of an economy already dangerously over- 
heated by the need to make up for the despoliation of war. The 
cheap money policy has stoked the boom conditions even further. 
The ever-growing depreciation in the value of money has shaken 
confidence in fixed interest bearing securities, and shattered the 
capital market. The revaluation of the Mark, and the law taxing 
the dividend coupons of German securities, have had a deleterious 
effect on foreign confidence and trust in the German capital market. 
The amassing by the Bundesbank of unusually large stocks of gold 
and foreign exchange created completely false ideas about the 
reputed wealth of Germany, and gave rise to the covetousness of 
those who wish to make use of this reputed wealth to finance 
overseas ventures. It is quite a long list of sins, all of which must be 
atoned for and replaced by a carefully thought out monetary policy. 
It is gratifying to note that at last the world of scholarship is also 
beginning to bestir itself. In the report by the committee of experts 



from which I quoted, a number of professors gave vent to their 
criticisms at the government’s request. 

Early in March, 1965, the List society of Frankfurt am Main 
organised a discussion and published the proceedings in a booklet. 
Naturally not all present were scientists. The gathering consisted 
of a small circle in which science, the economy, management and 
politics were all represented. Amongst the sixty-odd participants, 
some twenty came from the sciences, fifteen from industry and the 
economy at large, ten from management, and five from politics 
(this break-down may not be quite accurate). Subsequently, I was 
especially glad that privy councillor Vockc, my former Reichsbank 
colleague, was present. Unfortunately, the Bundesbank was not 
represented by its president, but two of its area managers, from 
Bremen and from Baden-Wiirttemberg, took his place. 

Now certainly no one expected a practical or practicable solution 
of Germany’s monetary difficulties from this conference. That is 
too much to expect from any conference. Nonetheless, everyone 
agreed about the facts of inflation, and about the need to abolish 
it and avoid a recurrence. There was also general agreement that to 
achieve this end there must be restrictions on expenditure. But there 
was some difference of opinion about the question of the free 
exchange rate and a possible change in the price of gold, as well as 
about some other questions of detail. And the question of what was 
to be done in the field of monetary policy remained unanswered. 
A few earlier errors were admitted. Pfleiderer’s (Landeszentralbank, 
Stuttgart) utterance ‘what in 1961 we did not do as a central 
currency bank, but allowed to be done to us by the decision of the 
government of the Bund in regard to re-valuation’ was to the 
best of my knowledge the first public acknowledgement of the 
fact that the Bundesbank - quite rightly - regarded the government’s 
decision to be mistaken. 

It is regrettable that the Bundesbank did not give public expression 
to its rejection of the revaluation of the Mark. While, after my 
departure, Hitler made the Reichsbank into a subjugated organ 
which could not do other than carry out the government’s orders, 
Germany’s central bank was entrusted with certain responsibilities 



by the Bund banking law, which inter alia permit it, nay oblige it, 
to express independent opinions. In the case of the revaluation of 
the Mark we were dealing with a basic and vital decision in regard 
to which the currency bank should have done more than simply keep 
its own counsel. 

The revaluation of the Mark was detrimental to all foreign 
customers for German manufactured goods. Dr Diiren of the Deuts- 
cher Industrie und Handelstag rightly objected during the discussion 
that an arbitrary intervention into the exchange rate structure put 
trading policies relating to the export of investment goods tied up 
with long-term credits into jeopardy. And this is just what Germany 
did to its customers with the arbitrary revaluation. Anyone who had 
bought in Deutschmarks and acquired the necessary sum in Dollars 
suddenly had to find five per cent more Dollars in order to be able 
to pay the agreed price. Had he bought in Dollars he would have 
been none the worse off. Then it would have been the German 
sellers who were worsted. German sellers remain unaffected by 
changes in exchange rates if they sell in Marks. 

Professor Lutz gave expressions to an excellent idea: ‘It is possible 
to gain from inflation only if certain people suffer thereby. Should 
this not be the case then it has no effect whatever’ (the profit-produc- 
ing effect for industry is meant). This idea is the death knell 
of all attempts to transfer the price inflation to wages and salaries 
by constantly increasing the latter in proportion to the price rises. 
No one is able to profit from inflation unless someone else loses by it. 

If the proceedings of this discussion thus confirmed a number of 
the views which I had previously put forward, my hopes for a 
positive programme of action were not fulfilled. On the other hand 
in his summing up of the general discussion Professor Giersch gave 
an admirable exposition of the problem of present-day monetary 
policy. So long, he said, as the gold standard was observed, that is 
in the period before the two world wars, it was the international 
gold movements brought about by the flexible exchange rates 
which formed the compass of trading policy. When there was an 
outflow of gold, tighter monetary and credit policies were indicated. 
When gold flowed in, it became possible to pursue more lenient 



monetary and credit policies. This was a rule which was obeyed 
on an international scale, and which made the dispositions of trading 
policy simple for all concerned. 

‘We have lost this compass/ Professor Giersch continued. ‘Every 
government, and those social and economic associations which aid 
and abet it, or think they do, conducts its trading policies by trial and 
error. Domestic economic interests predominate. This is especially 
grave for a country as strongly interested in the world market as 
Germany/ From this Professor Giersch concludes correctly 
‘International trade and capital transactions as free from risk as 
possible, and a stable rate of exchange which effects equilibrium can 
be attained without Schachtian restrictions only if the governments 
so co-ordinate themselves in their behaviour to each other that no 
disturbances are introduced into the system from this side. 

That is, in its shortest form, a representation of the views of those 
who today count as currency experts, but unfortunately it is only an 
ideal, not a solution. It asks that all countries pursue economic 
policies where everyone pays due regard to the economy of the 
others. This would mean transposing neighbourly love into the 
field of international economic competition. 

Professor Giersch makes it quite clear that a co-ordinated inter- 
national economic policy is a precondition for that new international 
monetary agreement of which there is constant talk at present. 
Only then will currency stability cease to be a problem. Of course, 
when this happy state of affairs has been achieved the devising and 
carrying out of currency policies will no longer be any great art. 
Then everything will go forward automatically. Will this pre- 
condition be fulfilled? The answer cannot be anything but a plain 
no. Thus something else will have to be done. 

When I read the words ‘without Schachtian restrictions' in 
Professor Giersch’ s exposition I was startled. Were my currency 
policies discussed at the Frankfurt conference? In my absence? 
To my surprise I realised that the German monetary policies of the 
’thirties had taken up a considerable amount of space in the con- 
ference. The fact that the Reichsbaxik had been able to master 
the difficulties encountered at the time was not easily erased from 



monetary history. The methods used then were recalled in associa- 
tion with the wish that one should not be compelled to use these 
methods or similar ones again. 

The banker L. Albert Hahn, who is probably the greatest expert 
on and critic of American conditions, proved himself to be most 
sceptical about present-day endeavours. Hahn’s point of departure 
was, quite justifiably, that the key to any international currency 
stabilisation lay with the United States. ‘I am convinced,’ said Hahn, 
‘that the Americans, unless at the last minute they go over to tight 
money policy, are with deadly certainty slipping into a gigantic 
international Schacht system ... in reality the world is moving 
towards a Schacht system under which we will have to live for a 
long time to come.’ Hahn predicts that a Schacht system will 
supervene unless the tensions of monetary policy are released by 
means of flexible exchange rates, or unless the internal domestic 
expansionary policies nurtured by cheap money are curbed by a 
dear money policy. 

Professor Giersch and Albert Hahn agreed that the connections 
between the participants in the international economy would have 
to be ordered over a long term of years before monetary harmony 
could come into being. Under no circumstances can such an order 
be introduced by means of monetary policies. Monetary policy 
is dependent on economic policy, and not the other way around. 
But monetary policy is not always defenceless against erroneous 
economic policies. This was the lesson to be gleaned by Germany 
from the experiences of the ’thirties. 

At that time we were further than ever from a co-ordinated 
international economic policy. All international trading policies 
discriminated heavily against Germany. Everywhere obstacles 
such as tariff walls, quotas and other impediments were placed in its 
path. If no counter-measures had been taken, Germany’s currency 
would have sunk into a bottomless pit. But for Germany, as for 
everyone else, life had to go on. And by means of the Schachtian 
restrictions life could go on. The policies successfully pursued in the 
’thirties sought to counteract each and every threat and wrong- 
headed measure taken by foreign powers. This resistance also gave 



our opponents a better insight into the situation, and ultimately 
resulted in normal relations being re-established. The policies of 
the Thirties were certainly not ideal, but they were unavoidably 
necessary at a time when every measure taken by those abroad was 
aimed at ruining the German economy. • 

Formerly, when international trading relations were normal and 
peaceful, flexible exchange rates helped to maintain order in the 
international currency system. Although they did not bring per- 
fection, they would prove helpful today too. 

Professor Gicrsch also considered unanimity in international 
economic policies to be very difficult to achieve. He did not want 
to shatter anyone’s hopes and illusions. But I will go further - I 
regard such unanimity to be contrary to nature, and therefore 
impossible. One need only call to mind the amount of sovereignty 
which would have to be sacrificed by the individual countries if 
such unity is to be attained. The United States, Russia and China 
all observing a common economic charter, that is unthinkable - 
quite apart from all the other countries. The Common Market 
negotiations give us a foretaste of the difficulties. 

But then, must we have perfection? After the nations have tom 
each other apart in the course of two world wars, they now seek a 
paradise on earth. The whole discussion about international 
currency today revolves around the catch phrase of international 
liquidity. That means: the world does not possess sufficient quan- 
tities of money to carry out the vast economic tasks which we have 
set ourselves. This is expressed by the words: lack of liquidity. 
The masses do not understand this jargon. Were one to say to 
the man in the street ‘We do not have enough money to bring 
Asia, Africa and South America to the same technical level as 
Europe and the United States’, he would reply ‘Then why don’t 
you give it up, or at least slow the process down?’ 

It seems that a war affects not only morals but also reason. The 
Western victorious powers are well-nigh panic stricken in their 
almost compulsive need to make good past errors and omissions. 
Under the sway of Communist propaganda they force independence 
and self-determination on primitive people who are quite unready 



for it. They impart amenities, comforts and techniques to people 
who do not know what to do with them. They intervene crudely 
in die natural course of historical development, and sincerely believe 
they are doing good. 

Such policies are of doubtful value. But what is certain is that it is 
quite senseless to prosecute those policies by means of artificially- 
created money, that is, money which undergoes inflationary de- 
valuation to the detriment of the broad mass of savers, savers who in 
the course of the centuries have with diligence and effort built up a 
standard of living which the new countries expect to have presented 
to them overnight on a platter. Such a thing cannot be given away as 
a gift. It makes more sense to use our spare productive energies to 
stimulate the productive potentials of primitive countries and make 
them capable of development. But this can only be done out of sur- 
pluses, that is out of savings. 

Germany has no need to make good any past errors and omissions 
in its relations with under-developed countries. Nor has it any kind 
of political interests which it could tie up with development aid. 
Unfortunately, Germany is not a sovereign state independent of 
foreign powers. Nonetheless, no one can prevent Germany from 
preserving its dignity and morality, and from applying its greater 
knowledge of some things. If Germany is forced to make payments 
against its interests and against its better judgment, then this must 
take place before the eyes of the world. The payments with which 
it is encumbered must be defrayed out of taxes and other receipts, 
never out of inflated money. The proposals for development aid 
which I made contained the proviso that Germany has die will and 
resolution to participate in development aid only within the frame- 
work of its savings. No one can compel a country to subject itself 
to inflation. 

I was able to help in ending the first inflation, I sacrificed my 
office, endangered my existence, and forfeited influence over events 
in the attempt to prevent the second inflation. I do not wish to 
abet the third inflation by remaining silent. If we do not manage to 
forestall the third inflation in good time it will lead us into an 
economic crisis of such proportions that even ‘Schachtian restrictions’ 

21 6 


may not suffice to effect a certain cure. There is no such thing as a 
Schacht system. On many occasions I have told those who put 
their faith in systems that monetary policy is an art. Art and systems 
contradict each other. 

Nor are the proposals which I have made in the present situation 
a system. They are measures tailored to processes which continually 
change in the course of events, thereby always requiring new ideas. 
Such new ideas must always be found afresh as required by the 
challenge offered by economic developments. Laws curbing 
dividends, bilateral trading policies, different sorts of Mark for 
different purposes, we do not want to see the like again. But if as a 
result of the unrestricted conversion of foreign currency, control 
of Germany’s note circulation is taken out of the hands of the 
the Bundesbank, if the boom is overheated because of an enforced 
cheap money policy, and if Germany’s contributions to development 
are either ineffectually squandered or spent without benefitting its 
economy, then ideas akin to those which had to be applied in the 
’thirties will once again be resurrected. For instance, it would be 
possible to apply bilateral trading agreements to development aid. 

Let us beware of a Schacht ‘system’, but let us also bear in mind that 
there is always a rational way of countering any irrational and 
outrageous demand. When the British Socialist Chancellor of the 
Exchequer, Sir Stafford Cripps, referred to me in 1945 he did not 
speak of a Schacht ‘system’, but said that without applying a few of 
Schacht’s ideas it would be difficult to re-establish Britain’s former 
position in the world economy. There will always be good ideas 
by means of which false notions can be combatted. It is unlikely 
that we shall reach a perfect international monetary system, but if 
we put our own currency in order we shall at least set a good 

We must get away from the idea that our economic problems 
can be solved by means of theories, rules and formulae. Certainly 
scientific considerations can be helpful, particularly if they are 
based on experience. But economic life is so diverse, so changeable, 
that even the most brilliant prescription is bound to come up against 



events which it did not foresee. The- Keynsian theory of deficit 
spending is basically correct, but it is founded on assumptions which 
are not always obeyed in the way provided for in the theory. One 
can learn to use tools, one can acquire experience, but the proper 
application of tools and experience necessitates an act of intellectual 
adaptation to each new circumstance. 



Within a national economy one man can enrich himself at the 
expense of another. The one loses what the other gains. Com- 
petition and social policy arc the motivating factors in the endeavours 
of the individual to obtain his share of the product of the entire 
nation. Economic policy lays down the boundaries of competition. 
Taxation legislation sees to it that the inequality between rich and 
poor does not become too great, but it is impossible to distribute 
more than is produced. It is sad that this home truth has to be 
repeated continuously. If one consumes more than is produced, 
one consumes not the proceeds of production, but its substance. 

Economic policies must therefore be directed either at producing 
as much as will be consumed, or at consuming no more than is 
produced. Economic policy decisions are naturally made more 
difficult by the fact that a people's consumption, or rather the demand 
for consumption, can be extended almost to infinity. Production, 
however, is limited by the opportunities and willingness to work 
on the one hand, and by the available quantities of capital and raw 
materials on the other. 

Every increase in demand stimulates an increase in production. 
The increase in demand after 1945 was enormous. The need 
to rebuild roads, houses, factories, communications and everything 
else which had been destroyed or worn out during the war led to 
an unusually great upsurge in production which was reflected in 
booming profits. The distribution of these profits amongst the 
population was very uneven. But what was worse - an insufficient 
proportion of these profits was employed for productive purposes, 




instead a large part was spent without considering the morrow.! 

A great part of Germany’s investment activity was financed 'by.;® 
means of short- and medium-term bank credits, and thus by means 
of book money which the banks created for the purpose. The gp| 
Bundesbank tolerated this process, and gave it support through a |f|l 
policy of cheap money. Recently it has paid more attention to this f i^f|j 

The constant growth in deposits with banks and savings banks 

is always interpreted as a favourable sign, although the numerical 
growth only reflects the falling value of money. The saver no longer 
invests his money in long term debentures and loans. Instead he 

puts his money into bank and savings bank accounts from which 


he can withdraw it at short notice. The capital market of former 
days has ceased to exist. The savings banks and banks for their part 
lend money for the long term, and in the case of a serious run by die 
depositors they must in the case of Germany resort to the Bundes- 
bank’s bank note printing presses. 

This is however tantamount to a new inflation since the central;S 
bank cannot convert its gold and foreign exchange reserves into® 
Deutschmarks. The best it can hope to do is to realise these assi 
abroad in exchange for foreign currency. The excessive increase im||| 
home consumption has led to over-investment. Although by 
the ideal of full employment had already been reached, investment ffe 
continued apace, and this with inflated money. Germany givestl^ 
employment to one and a quarter million foreign labourers who||§$l 
drive up wages. Rises in production costs keep in step with pricey ^* ’^ 
rises, and sometimes even outpace them. The more lavish home ; . 
consumption becomes, the smaller a proportion of production is 

Should the government succeed in curbing public expenditure, 
it would make a considerable contribution to the restoration of the 
German capital market. If it fails, the only other means open to it is 
higher taxation. It has already started to tread this path by raising 
certain consumer taxes. But such a measure on its own will not 
yield a great deal of revenue. An increase in income tax would 
raise serious misgivings, and arouse much popular resistance. There 

■?* '/w 








is therefore a threat of higher inheritance and wealth taxes. Such 
taxes would be bound up with new financial difficulties. Tangible 
assets would have to be converted into ready cash. 

Always and again the magic of money presents us with problems. 
These problems change constantly. Time after time experience 
teaches us that there is no universally-valid system by means of 
which monetary problems may be solved. Every new situation 
demands new deliberations, new measures, new insights, new ideas. 
Each of these ideas must be informed by and subservient to the sole 
and single purpose of maintaining the soundness of the currency.